A World Bank sector report on fiscal decentralization in India, published in January 2004, reviewed the finances of local governments (panchayats), identified the main problems with current practices, and offered recommendations for improvements. The review focused on two of the most reform-minded states in India, Kamataka and Kerala, and used their panchayats as case studies for their positions within the Indian intergovernmental system.
In this presentation, the ninth lecture in the South Asian Decentralization series, senior economist for the South Asian region Geeta Sethi reflected on the report and listened to comments from fellow World Bank staff. Sethi focused on three aspects of the study: (1) the initiatives undertaken by the government India to enact decentralization; (2) the structural flaws regarding the intergovernmental system in India; and (3) the value-added the World Bank can contribute through capacity building.
Sethi stressed the importance of the 73rd and 74th amendments to the Indian constitution, which mandated rural and urban decentralization. Adopted in 1992, the amendments tried to address one of India’s fundamental governance issues by establishing the Central Finance Commission, a body that would come together every five years to make fiscal policy recommendations. The amendments also required that every state set up a State Finance Commission (SFC) to oversee its fiscal policy and establish a legislative framework so that SFC recommendations could be implemented into the lawmaking process.
The intergovernmental system in India is very complicated, Sethi explained. Separated into three tiers — central, state, and local, with the local level subdivided further — there has never been a consensus on what are the expectations for local panchayats. Money flows down from the top tier earmarked for certain initiatives or expenditures, giving the local governments little control over spending and causing some citizens to question the third tier’s legitimacy and efficacy.
The system’s major shortcoming is that there is little capacity in India to understand the design flaws — a shortcoming which the World Bank can help to overcome, Sethi said. She described the benefits of the enhanced analysis done by the Bank, which concluded that there was little transparency, sparse information sharing, and virtually no examination of relevant data by the SFC’s. She also pointed out that progress is imminent, as both states have asked the findings to be publicized so that the structural issues can be addressed. The entire system, not just the third tier, will have to be scrutinized, she warned, also offering three reform recommendations. First, a permanent SFC with appropriate technical skills should continuously monitor, advise and influence policy decisions. Second, a high-quality information monitoring system should aid in determining rewards and penalties for state governments. Finally, a practical financial management system should allow local governments to know what their resources are on a day-to-day basis.
Bank senior public sector specialist Dana Weist added that it was important to consider all of these complicated intergovernmental fiscal relations in a consistent and balanced manner. Deborah Wetzel, a sector manager in Europe and Central Asia, reflected on the similarities of India to Russia. Important issues in the present situation of India, she said, are the context, the rural nature of the project, service responsibility, revenue autonomy, tax administration and financial management. Lessons must be learned from other countries who have already found solutions to questions like how to deliver services to rural areas and what is the most efficient magnitude at which a service can be provided. The Bank’s South Asian chief economist, Shantayanan Devarajan, posed one final question before yielding to the floor. How can one be so certain, he asked, that the so-called structural problems were not deliberately put there as part of a “political game”? Devarajan said that the bureaucrats in the central government may never have intended for decentralization to work, or that they may have hoped to apply pressure to state governments from the bottom up.
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