The Objectives and Role of Fiscal Decentralization in

The Objectives and Role of Fiscal Decentralization in India Presented by: Dr. R. P. Acharya, Director, Department of Atomic Energy, India

The Objectives and Role of Fiscal Decentralization in India l v v v India is a land of diversities : Heterogeneous polulation of more than 130 crores, multiple languages, religions customs and traditions Hence Inter-governmental fiscal relations in India must thus be understood in the context of this broader perspective. l Modern Era : State is under obligation to promote equity , justice and fair play to achieve its mission. l These tasks lay a foundation to establish macroeconomic stability and form the basis of the working of any government.

The Objectives and Role of Fiscal Decentralization in India Contd… l For this to happen government requires the appropriate framework and effective institutional capacity to deliver. l Here comes the concept of decentralization which is transfer of authority and responsibility from Central Government to State governments and local authorities. l v v Fiscal Decentralization : The distribution of powers, functions and finances among different tiers of government is ‘Fiscal Decentralization and in recent years, the subject of fiscal decentralization has received enthusiastic attention. l This Decentralization is seen as a remedy for most ills and a means to good governance:

Historical Background l l l The government of India Act 1935 laid the foundation of the federal structure in India. Some decentralization was there in this act. The constitution of India adopted a democratic set-up and a federal structure that is federal in form but unitary in spirit. Two Tier government – the Central Government and the state governments. Panchayati Raj was only a part of the Directive Principles of State Policy (Article 40) There was a clear distinction between the Union and the States in the functions and sources of revenue and the Residual powers belonged to the Central Government. Three lists under the constitution : Union , State and Concurrent Central Government transfer by way of tax devolution and grants-in aid, loans & advances

Historical Background Contd… q q q In the year 1991, a major paradigm shift that led to a gradual weakening of the role of central planning. 73 rd and 74 th constitutional amendments in 1992 gave a statutory authority to the Third Tier of the Indian federation and strengthened the local rural and urban governments. . Through these amendments, provisions were made relating to constitution and composition of the Panchayats and Municipalities and the functional and fiscal powers of the bodies and institutional arrangements for planning for economic and social development. The Panchayati Raj Institutions(PRIs) provided with more powers and authority, The act empowers the State governments to appoint State Finance Commissions (SFC) which were to recommend distribution and assignment of taxes, duties etc between state and the PRIs, grants-in-aid to the PRIs from the Consolidated Fund of the State.

Objective & Role of Fiscal Decentralization l Objective Devolution of financial powers : Local participation Expected to achieve efficient allocation of resources, improve governance, accelerate economic growth, reduce poverty, achieve a gender balance and empower weaker sections of society. Revenue generation l Role l Fiscal decentralization can take many forms, including: self-financing or cost recovery through user charges, co-financing or co-production arrangements through which the users participate in providing services and infrastructure through monetary or labor contributions; expansion of local revenues through property or sales taxes, or indirect charges; l l l

Objective and Role Contd… l l l a) b) c) d) e) Intergovernmental transfers like shifting of general revenues from taxes collected by the central government to local governments for general or specific uses; and Authorization of municipal borrowing and the mobilization of either national or local government resources through loan guarantees. The Constitution contains provisions for the distribution of revenues from certain central taxes among the states. Taxes within central jurisdiction can, therefore, be divided into four classes taxes which are levied and collected and wholly retained by the Centre taxes levied and collected by centre but proceeds shared with the states taxes levied and collected by the centre but proceeds assigned to the states taxes levied by the centre, collected and appropriated by states Decentralization of function and financial powers become most important means of self-governance and strengthening of local institutions with best practices of financial management is the need of the hour.