EMPOWERING LOCAL GOVERNMENTS

THE CONTEXT: The 73rd and 74th Constitutional Amendment Acts (1992) transformed India’s federal structure by empowering Local Government Institutions (LGIs)—panchayats and municipalities—as constitutionally mandated third-tier governments. Over three decades, UFCs (from the Tenth to Fifteenth Finance Commissions) have played a pivotal role in fiscal devolution to LGIs. However, challenges persist in aligning resource transfers with functional devolution, equity, and effective service delivery.

CONSTITUTIONAL MANDATES AND FISCAL FEDERALISM

Constitutional Provisions:

1. • Articles 243(G) and 243(W): Mandate states to devolve powers to LGIs for economic development and social justice.
   • Article 280(3) (bb) and (c): Directs UFCs to recommend measures to augment state funds for LGIs, based on State Finance Commission (SFC) reports.
   • 11th and 12th Schedules: Outline 29 functions for panchayats (e.g., agriculture, rural housing, sanitation) and 18 for municipalities (e.g., urban planning, slum improvement), requiring alignment of fiscal powers with responsibilities.

Role of UFCs:

1. • UFCs bridge the gap between cooperative federalism (centre–state collaboration) and democratic decentralization (empowering LGIs).
   • Key Focus Areas: Supplementing LGI resources, addressing vertical imbalances (centre–state–local fiscal relations), and promoting equity.

FISCAL DEVOLUTION MECHANISMS:

 CRITERIA FOR HORIZONTAL DEVOLUTION

Dominant Factors & Limitations:

• • Population (60–80% weightage): The 15th FC shifted to 2011 Census data (from 1971), aiming to reflect demographic realities. However, this penalizes states with higher population control success (e.g., Kerala, Tamil Nadu).
  • Area (10–20%): Favors geographically large states (e.g., Rajasthan) but ignores ecological costs (e.g., forest conservation in Uttarakhand).
  • Neglect of Equity Metrics:
    • Income Distance: Only 15% weightage in 15th FC, despite its role in addressing regional disparities. For instance, Bihar (PCI ₹54k) receives less than Karnataka (PCI ₹3.04 lakh).
    • Tax Effort: States like Maharashtra (tax-GSDP ratio 18.5%) receive no reward for high revenue mobilization.
    • Demographic Performance: Kerala’s low fertility rate (1.8) vs. Bihar’s (3.0) is unaccounted, perpetuating inequity.

 CONDITIONAL VS. UNCONDITIONAL GRANTS

Conditional Grants:

• • 15th FC’s Sanitation-Linked Grants: 43% tied to ODF+ status and property tax efficiency. Tamil Nadu achieved 98% ODF+ compliance but Maharashtra lags at 72% due to weak urban governance.
  • Performance Grants: Thirteenth FC’s 35% tied to audits. However, CAG reports (2023) show only 45% of panchayats submitted audit reports, highlighting implementation gaps.

Unconditional Grants:

• • Fourteenth FC’s 87% Untied Funds: Enabled Kerala to allocate 60% of grants to health and education, achieving 99% literacy vs. Bihar’s 69% (NSO, 2023).
  • Risk of Misutilisation: Jharkhand diverted 32% of untied funds to non-priority sectors (CAG, 2022).

PANCHAYAT–MUNICIPALITY ALLOCATION

Rural-Urban Shift:

• • From 81:19 (Tenth FC) to 65:35 (Fifteenth FC): Reflects urban population growth (31.16% in 2011 vs. 17.9% in 1961).
  • 15th FC’s Urban Focus: Allocated ₹8,000 crore/year for cities, but only 12% spent on climate-resilient infrastructure (MoHUA, 2024).

• • • Tamil Nadu: Used 14th FC grants to install 1.2 lakh streetlights in panchayats but faces O&M cost challenges (TN Finance Commission, 2022).
    • Assam: Allocated 85% of 14th FC grants to rural bodies but 40% remains unutilized due to capacity deficits (CAG, 2023).

Emerging Urban Challenges:

• • Smart Cities Mission: Only 22% of projects completed, exposing fund-flow bottlenecks.
  • Kerala HC Ruling (2025): Allowed delimitation of municipalities based on “administrative efficiency”, not just population, setting a precedent for need-based funding.

TRENDS IN FUND DEVOLUTION

Finance Commission	Key Innovation	Outcome
10th FC (1995–2000)	Introduced ad hoc grants due to absent SFCs.	₹5,380 cr devolved; 70% spent on water supply in drought-prone states.
14th FC (2015–20)	Largest devolution (₹2.87 lakh cr); untied funds.	Kerala’s LSGIs doubled healthcare spending; UP’s utilization rate: 58%.
15th FC (2021–26)	Cess exclusion debate; 4.34% of divisible pool.	₹4.36 lakh cr allocated but 22% withheld due to non-compliance (MoF, 2024).

CHALLENGES IN FISCAL DECENTRALIZATION: 

• • 3F Framework (Functions, Funds, Functionaries): Despite constitutional mandates (Art. 243G/243W), only 13 states (e.g., Kerala, Karnataka) have operationalized Fifth SFCs, while others like Uttar Pradesh (UP) and Bihar lag in transferring functions like primary healthcare and rural housing (MoPR, 2023).

• • • Kerala’s Success: Transferred 1,214 functions to panchayats, achieving 94% literacy and 100% sanitation coverage. Contrast this with UP, where only 40% of 11th Schedule functions are devolved (NITI Aayog, 2024).
    • Maharashtra’s Paradox: Transferred urban planning to municipalities but withheld staffing powers. Result: 60% of civic projects delayed (CAG, 2024).

• • Structural Flaws in SFCs: Only 5 states (Kerala, TN, Gujarat, Karnataka, MP) align SFC timelines with UFCs. Others like Bihar submit reports 3–5 years late, forcing UFCs to rely on ‘guesstimates’ (15th FC Report). 12th FC found SFC reports “inadequate for estimation”, leading to ad hoc grants. Ex: ₹2.3 lakh crore allocated post-2015 without needs assessment (RBI, 2023). 15th FC’s intervention mandated ‘entry-level conditions’ (e.g., audited accounts) for grants. Yet, only 45% of panchayats complied (CAG, 2024).

 Service Delivery Outcomes:

• • Drinking Water: Despite ₹1.2 lakh crore allocated (2015–2023), 42% of rural households lack piped water (JJM Dashboard, 2024). Bihar (₹18,000 crore grants) improved coverage by only 12% (WSSC, 2023).
  • Sanitation Paradox: Odisha utilized 92% of SBM-G grants to achieve 85% ODF+ villages, while Punjab (high PCI) stagnated at 70% due to ‘scheme fatigue’ (MoHUA, 2024).

THE WAY FORWARD:

Equity-Centric Devolution Anchored in SDGs: Articles 280(3)(bb) & 243(G) mandate equity-driven fiscal transfers.

• • Deprivation Index (NITI Aayog’s SDG Index): Allocate 25% weightage to HDI, infrastructure gaps, and climate vulnerability. Example: Allocate ₹10,000 crore to 112 aspirational districts (Census 2021).
  • Case Study: Kerala (SDG Index: 75) reduced infant mortality to 7/1,000 using untied grants. Contrast with Bihar (SDG Index: 52), where 58% PHCs lack doctors despite ₹18,000 crore grants (NHFS-6).

 

Climate Finance Integration in Fiscal Federalism: Disaster Management Act, 2005 (Art. 280 mandates disaster funding review).

• • Mandate 10% Grants for Green Projects:MP’s solar panchayats saved ₹200 crore/year (PM-KUSUM). Kerala’s ₹500 crore GIS-based flood mapping reduced risks by 40% (NDMA, 2024).
    Rajasthan’s MoU with NTPC Green Energy (₹1.6 lakh crore renewable projects) aligns with SDG 7.

 

Digital Decentralization & AI-Driven Accountability: E-Governance (Art. 243ZD mandates district planning).

• • Blockchain for Grants (Telangana Pilot):Reduced leakages by 22% (World Bank, 2023). Scale to 4,000 ULBs.

• • E-Gram Swaraj 2.0 + Aadhaar: Link ₹1.5 lakh crore grants to 250 million beneficiaries (MoPR, 2025). Andhra’s “e-Pragati” cut corruption by 35% using real-time tracking (CAG, 2024).
  • OECD (2025): Proposes “predictability index” for fund flow (Kerala: 95/100; Bihar: 30/100).

 

Gender Budgeting as a Fiscal Imperative: 73rd/74th CAA (Art. 243D reserves 33% seats for women).

• • Kerala’s “Gender Selfie” App: Allocated 30% grants to SHGs, boosting participation by 40% (Kudumbashree, 2024).
  • Goa’s Gender Budget (2024): 13 departments allocated ₹2,100 crore for women-specific schemes.
  • UN Women (2024): India ranks 127/146 in Gender Gap Index; fiscal empowerment can bridge gaps.

 

Strengthening SFCs via Carrot-and-Stick Federalism: Articles 243(I) & 243(Y) mandate SFCs every 5 years.

• • SFC-UFC Synchronization: Penalize non-compliant states (e.g., Jharkhand’s 32% cut in 2023) and reward Gujarat (95% compliance).
  • Karnataka’s 5th SFC recommended ₹12,000 crore for ULBs; 80% implemented. Only 13 states constituted 5th SFCs (NITI Aayog, 2024).

 

Vertical Fiscal Imbalance Correction via Cess Integration: Article 270 excludes cess/surcharge from divisible pool. Cess exclusion undermines cooperative federalism; 16th FC must integrate it.

• • Include ₹4.5 Lakh Crore Cess (2023-24):Address vertical imbalance (Centre: 59% vs. States: 41% in 15th FC).
  • Tamil Nadu lost ₹8,000 crore due to cess exclusion (State Finance Report, 2024).

THE CONCLUSION:

The 16th FC must transcend traditional fiscal federalism by embedding SDGs, climate resilience, and digital innovation into India’s fiscal architecture. By prioritizing equity over populism and accountability over ad-hocism, it can transform LGIs from “fund recipients” to “development catalysts,” aligning with PM Modi’s vision of “Viksit Bharat @2047”. As Amartya Sen asserted, “Development is freedom”—the 16th FC must make fiscal devolution a tool for emancipating India’s marginalized.

UPSC PAST YEAR QUESTION:

Q. The strength and sustenance of local institutions in India has shifted from their formative phase of ‘Functions, Functionaries and Funds’ to the contemporary stage of ‘Functionality’. Highlight the critical challenges faced by local institutions in terms of their functionality in recent times. 2020

MAINS PRACTICE QUESTION:

Q. Critically evaluate the role of UFCs in strengthening fiscal federalism, highlighting the constitutional, institutional, and equity-related challenges. Suggest reforms for the Sixteenth Finance Commission to transform Local Government Institutions (LGIs) into effective instruments of self-governance.

SOURCE:

https://www.epw.in/journal/2025/8/insight/empowering-local-governments.html?check_logged_in=1

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