Sources of Funds
The Amendments left important matters such as implementation, service delivery (including local capacity building) and transfer of responsibilities and powers to rural local bodies at the discretion of the state legislatures. Consequently, while expenditure responsibilities of local bodies are extensively enhanced, there is no law to ensure a corresponding assignment of funds to match the additional responsibilities. The decisions as to which taxes, duties, tolls and fees should be assigned to local governments and which should be shared by the State with them continue to be with the state legislatures. An appropriately designed transfer system is needed to balance spending needs with local Resources.
The SFCs are required to recommend financial support from the state and principles for determination of taxes, tolls and fees that could be assigned to or appropriated by the local bodies. At present, not much fiscal power is vested in the hand of the panchayats. Their finances are drawn largely from tax assignment, tax sharing and grants-in-aid from the state and the centre while the share of own tax and non-tax revenue is very small. The non-tax sources include user charges on public facilities, and on the use of common resources in the form of forests, water bodies, quarried materials and minor Minerals; and taxes on private property. In addition funds flow from the central government on the basis of the recommendations of the Central (National) Finance Commission and the Planning Commission.
An evaluation of PRIs’ sources of income including their tax powers and the authority to borrow shows that they differ substantially across states as between the fiscal size and sources of revenue available to different levels of PRIs and their administrative set-up. Most powers to levy various kinds of taxes and duties in rural areas are enjoyed by gram panchayats (GPs) whereas the first and second tiers, i.e., zilla parishads (ZPs) and panchayat samitis (PSs) are in general not entrusted with taxing powers. When these two tiers do levy these charges, they are often collected at the village level and then passed on to the higher levels of rural bodies. However, PRIs hesitate to levy and collect taxes.
After tax assignment, tax sharing is the major source of PRI finance. Such revenues are of two kinds. First, the law itself authorizes the State Government to levy and collect revenue on its own and pass on a portion of it to the local bodies after deducting collection charges. Land revenue on agricultural land and stamp duty on transfers of property are two such important taxes on private property in rural areas which are shared with panchayats. Seigniorage royalties (royalties on minor minerals and quarried materials like granite and sand) and forest revenue are also shared with PRIs in the same fashion. The second category consists of taxes or fees which normally belong to the local bodies but whose collection is taken over by the state for administrative reasons.
Devolution of Resources and Financial Autonomy of Panchayats
PRIs need additional resources and financial autonomy to fulfill their new functional obligations. But the record on transfer of funds to panchayats for the subjects devolved upon them is not encouraging. Many of the powers given to local bodies are delegated powers and most state governments have retained substantial financial and administrative power which suppresses the autonomy of PRIs. Major areas of rural development expenditure and funds associated with them are kept out of the purview of the locally elected bodies. The earlier “bureaucratic practice” of BUDGETING for local expenditure has not changed so that even after budget approval, funds are often not made available to rural governments because of cash constraints in a state.
In practice, financial autonomy means release of funds without any technical clearance or conditionalities attached. For example, panchayats in Kerala and Punjab can spend up to Rs 1 lakh and in Madhya Pradesh up to Rs. 3 lakh to take up work without any outside clearance. But in most other states, lower levels of village governments require clearance from the next higher level to spend allocated funds. It is not surprising then to find that the PRIs in most states are restricted in spending their funds. In many cases there is neither a sufficient devolution of resources nor adequate revenue raising power with PRIs, which reinforces their dependence on higher level bodies rather than their Empowerment. In Karnataka, e.g., gram panchayats have neither the access to funds from state nor the power to make their own decisions about their requirements while the higher level rural governments fix the priorities and spend the funds. A large fraction of PRI spending is on staff salaries financed from grants from higher level governments implying thereby a low degree of expenditure autonomy. In 1999-00 general administration, most of which goes on salaries, and expenditure on (tied) development grants constituted more than 80% of total spending of PRIs in most states. Most of the remaining expenditure was towards obligatory Services leaving less than 2% for services at the discretion of the panchayats.
Fiscal Devolution to Rural Governments
Fiscal Decentralization to rural Local Government in India is meaningful only when the panchayats have adequate untied funds to provide public services assigned to them which requires assignment of tax powers to them. The fiscal decentralization envisaged in the Constitutional Amendment has the potential to significantly improve the efficiency of public services delivery in the country. The resources of the panchyats broadly comprise internal revenue mobilized by themselves through the exercise of tax and nontax powers, and resources received from the state in the form of devolution and grant from both the state and the Union Governments. There are essentially three type of taxes which devolve on panchayats; own taxes- the levy, collection and use of which vests in the panchayats by statute; assigned taxes- the levy and collection of which vests in state but its use vests in the panchayats and shared taxes, the levy and collection of which vests in the state government but shared with local bodies. The non-tax sources for PRIs consists of revenues from licence fees, fines and penalties, rent/leases on governmental properties. But the taxes, duties, tolls and fees to be levied by them and assigned to them and the grant-in-aid to be given to them are left to the discretion of the state governments. Therefore the fiscal mismatch not only between own revenue and total expenditure but also between total revenue and total expenditure of panchayats present very interesting picture and demonstrates that panchayats are facing a huge deficit and their own resources are meager to meet out the emerging fiscal needs and even the meeting out the committed liabilities.
Issues and Challenges
As per the implementable rules of fiscal decentralization,financesshouldfollowfunctional assignments. But PRIs are marked by their poor internal revenue effort and high dependence on grants-in-aid and assigned revenues from both Central and state governments. Improving own resources strengthen the link between revenue and expenditure decisions of the rural local bodies at the margin, which is extremely important to promote both efficiency and accountability in the provision of services. But the resource mobilisation by the PRIs is limited as the taxes like land revenue, house tax etc transferred to them by the state governments are less buoyant in nature. For local governments to fully deliver the potential benefits of decentralization, they need to be fiscally empowered. There is considerable need to rationalize the assignment system to enable the decentralized governments to raise revenues and incur expenditure according to the preference of their citizens. Expenditure functions remain non-transparent and very little expenditure autonomy has been given. It is important to specify expenditure responsibilities to enhance accountability, reduce unproductive overlap, duplication of authority and legal challenges. It is believed that more local control over expenditure decisions can make things better and improve service delivery. As state governments themselves are faced with several resource constraints, the revenue accruals to the local bodies are not adequate to enable them to effectively deliver the required standards of public services. An effective institutional mechanism is required for facilitating fiscal decentralization, for enabling the state to monitor the fiscal performance of local governments, identify those in financial difficulties as well as those exerting weak revenue mobilization efforts. It is also important to monitor the success of central government instruments (transfers, subsidies, local taxes) on a periodic basis.
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Devolution of power and finances up to local levels is the process of transferring decision-making authority and resources from central government to local authorities. This can be done through a variety of mechanisms, such as decentralizing government departments, creating new local governments, or granting local governments greater autonomy.
There are a number of reasons why countries might choose to devolve power to local levels. One reason is to improve efficiency and effectiveness. Local governments are often better placed to understand the needs of their communities and to tailor services accordingly. They can also be more responsive to changes in local circumstances.
Another reason for devolution is to promote Democracy and accountability. By giving local people a say in how their communities are run, devolution can help to build trust and legitimacy in government. It can also help to reduce Corruption and improve transparency.
Devolution can also help to promote Economic Development. By giving local governments more control over their own resources, they can invest in Infrastructure-2/”>INFRASTRUCTURE, Education, and other areas that will help to create jobs and grow the economy.
However, devolution also poses a number of challenges. One challenge is ensuring that local governments have the capacity to carry out their new responsibilities. This can require building up their skills and expertise, as well as providing them with adequate resources.
Another challenge is ensuring that local governments are accountable to their citizens. This can be difficult, particularly in countries with weak institutions. It is important to have strong mechanisms in place to ensure that local governments are transparent and responsive to the needs of their communities.
Finally, devolution can sometimes lead to conflict between different levels of government. This can be particularly problematic if there is a lack of clarity about the Division of Powers between central and local governments. It is important to have clear and well-defined rules in place to prevent such conflicts from arising.
Despite the challenges, devolution can be a powerful tool for improving governance and promoting development. When done well, it can help to make governments more efficient, effective, and accountable. It can also help to promote democracy and economic Growth.
The following are some of the challenges that can arise in devolution of power and finances up to local levels:
- Capacity building: Local governments may not have the capacity to carry out their new responsibilities. This can require building up their skills and expertise, as well as providing them with adequate resources.
- Accountability: It can be difficult to ensure that local governments are accountable to their citizens. This can be particularly problematic in countries with weak institutions. It is important to have strong mechanisms in place to ensure that local governments are transparent and responsive to the needs of their communities.
- Conflict: Devolution can sometimes lead to conflict between different levels of government. This can be particularly problematic if there is a lack of clarity about the division of powers between central and local governments. It is important to have clear and well-defined rules in place to prevent such conflicts from arising.
Despite these challenges, devolution can be a powerful tool for improving governance and promoting development. When done well, it can help to make governments more efficient, effective, and accountable. It can also help to promote democracy and economic growth.
What is devolution?
Devolution is the transfer of power from a central government to local governments. It can be done in a number of ways, such as through legislation, constitutional amendment, or executive order.
Why is devolution important?
Devolution can help to improve government efficiency and effectiveness by giving local governments more control over their own affairs. It can also help to promote democracy and accountability by giving citizens a greater say in how their communities are run.
What are the challenges of devolution?
One challenge of devolution is that it can lead to inequality between different regions. This is because some regions may be better able to manage their own affairs than others. Another challenge is that devolution can make it more difficult for the central government to coordinate policy across the country.
What are some examples of devolution?
Some examples of devolution include the devolution of power to Scotland, Wales, and Northern Ireland in the United Kingdom; the devolution of power to the states in the United States; and the devolution of power to the provinces in Canada.
What are some of the benefits of devolution?
Some of the benefits of devolution include:
- Increased efficiency and effectiveness of government: Devolution can help to improve government efficiency and effectiveness by giving local governments more control over their own affairs. This can lead to better services and lower costs.
- Increased democracy and accountability: Devolution can help to promote democracy and accountability by giving citizens a greater say in how their communities are run. This can lead to better decision-making and a more responsive government.
- Increased innovation and creativity: Devolution can help to increase innovation and creativity by giving local governments more freedom to experiment with new ideas. This can lead to better services and a more vibrant economy.
What are some of the challenges of devolution?
Some of the challenges of devolution include:
- Inequality: Devolution can lead to inequality between different regions. This is because some regions may be better able to manage their own affairs than others. This can lead to a situation where some regions are better off than others.
- Lack of coordination: Devolution can make it more difficult for the central government to coordinate policy across the country. This can lead to a situation where different regions have different policies, which can be confusing and difficult to understand.
- Conflict: Devolution can lead to conflict between different regions. This is because different regions may have different priorities and interests. This can lead to a situation where different regions are competing for resources and power.
What are some of the solutions to the challenges of devolution?
Some of the solutions to the challenges of devolution include:
- Investing in local government: One way to address the challenge of inequality is to invest in local government. This can help to ensure that all regions have the resources they need to manage their own affairs.
- Promoting cooperation: Another way to address the challenge of inequality is to promote cooperation between different regions. This can help to ensure that different regions work together to address common problems.
- Strengthening the central government: One way to address the challenge of lack of coordination is to strengthen the central government. This can help to ensure that the central government has the power to coordinate policy across the country.
- Promoting dialogue: Another way to address the challenge of lack of coordination is to promote dialogue between different regions. This can help to ensure that different regions understand each other’s priorities and interests.
- Investing in conflict resolution: One way to address the challenge of conflict is to invest in conflict resolution. This can help to ensure that different regions are able to resolve their differences peacefully.
- Promoting Tolerance and understanding: Another way to address the challenge of conflict is to promote tolerance and understanding between different regions. This can help to ensure that different regions respect each other’s cultures and values.
Question 1
Which of the following is not a challenge to devolution of power and finances up to local levels?
(a) Lack of capacity at the local level
(b) Lack of political will at the central level
(c) Lack of coordination between different levels of government
(d) Lack of accountability at the local level
Answer
(d) Lack of accountability at the local level
Explanation
All of the other Options are challenges to devolution of power and finances up to local levels. Lack of accountability at the local level is not a challenge, as it is one of the objectives of devolution.
Question 2
Which of the following is not a benefit of devolution of power and finances up to local levels?
(a) Increased efficiency and effectiveness of service delivery
(b) Increased participation of citizens in decision-making
(c) Increased accountability of government to citizens
(d) Increased corruption
Answer
(d) Increased corruption
Explanation
All of the other options are benefits of devolution of power and finances up to local levels. Increased corruption is not a benefit, as it is one of the challenges of devolution.
Question 3
Which of the following is not a principle of devolution?
(a) Subsidiarity
(b) Local autonomy
(c) Accountability
(d) Transparency
Answer
(d) Transparency
Explanation
All of the other options are principles of devolution. Transparency is not a principle, as it is a requirement for all levels of government.
Question 4
Which of the following is not a tool for devolution?
(a) Decentralization
(b) Deconcentration
(c) Devolution
(d) Delegation
Answer
(d) Delegation
Explanation
All of the other options are tools for devolution. Delegation is not a tool, as it is a process that can be used at any level of government.
Question 5
Which of the following is not a condition for successful devolution?
(a) Political will
(b) Financial resources
(c) Institutional capacity
(d) Public support
Answer
(d) Public support
Explanation
All of the other options are conditions for successful devolution. Public support is not a condition, as it is not always necessary for devolution to be successful.