India: The third tier Suman Bery, Director-General Member, Prime Minister’s Economic Advisory Council GINI Network Workshop Singapore, August

An independent economic research organisation; 53 years strong Current research areas include: - Macro Analysis and Forecasting -Household and Consumer Behaviour -Consumer Trends -Trade Policy Analysis - Infrastructure and Regulation About NCAER

The Problem India’s constitution formally recognises two levels of government: “union” and states. Clear provisions for allocation of revenue, expenditure between this first and second tier. (Finance Commission; State and concurrent lists). 73 rd and 74 th amendments in 1993 gave official political recognition to a “third tier”: panchayati raj institutions and urban local bodies.

The Problem Legislation national in scope; some areas excepted. Built in many cases on earlier structures. Implementation left to state governments. Primarily political, but also administrative: “funds, functions, functionaries” to be devolved. Three million elected representatives to 250,000 bodies. Women’s reservation.

The Problem Recent concerns: social indicators, service delivery, welfare programmes; search for “inclusive growth”. Also concern to integrate local taxes into national “goods and services tax” (GST). NCAER engaged in major research programme on political decentralisation and service delivery, supported by IDRC grant.

Revenue Devolution Thirteenth Finance Commission ( ); reported end Accepted in principle. ‘To make recommendations on ”the measures needed to augment the Consolidated Fund of a State to supplement the resources of the Panchayats and Municipalities in the State on the basis of recommendations made by the Finance Commission of the State”’

Revenue Devolution Reflects acute sensitivity on part of states, centre not to disturb constitutional balance, state autonomy (cf. Brazil 1988). Makes statutory revenue devolution problematic. Past FCs resorted to small ad hoc grants in past. Not fully drawn. FCXIII : transfer share of divisible pool as grants-in-aid, above the share of the states, through the Union Budget. Award is 1.93% of “divisible pool.”

Revenue Devolution Grant divided into basic and performance- based component; performance subject to state-level conditionality. Elements of conditionality: improved accounting, auditing for LBs; prompt transfer of funds; enabling legislation to expand property-tax base; service standards for key local services etc. Needs to be complemented by local taxation, user charges etc.

Looking Ahead “The emergence of rural and urban local bodies as key players in bringing about a development transformation has been recognised by this Commission. Local bodies must be increasingly empowered to fulfill their responsibilities, and …this would…involve a fundamental rethink of the Constitutional arrangements regarding inter- governmental allocation as well as devolution of resources to the third tier”.

Expenditure Issues Serious under-provision of local services, partly (not entirely) due to financing problems. 52% of rural population has access to rural sanitation; 70% of urban households to piped water. SFCs: share of rural local bodies in state expenditure should rise from 5-6% to 15%.

Expenditure Issues Unsatisfactory social indicators have led to a massive increase in targeted central programmes (CSS-centrally sponsored schemes). Growing “agency” functions (i.e. tied expenditure) of panchayati raj institutions (PRIs) in administration of these schemes. ( estimate Rs 95,000 crore), even while own resources are grossly inadequate.

Expenditure Issues Severe resistance at both central and state government level to expand block grants/untied transfers to third tier: inadequate capacity; possible elite capture, dilution of political credit (e.g. NREGA). Increasing academic research exploring links between devolution, decentralisation and service delivery

Concluding Remarks Attempt to empower “third tier” politically still a work in progress. States jealous, protective of their constitutional rights. Reflected in current debate on GST. Under-provision of quality local public goods reaching crisis proportions. Not just India. Worth comparing experiences across region.

Thank You