Growth-Accelerating Fiscal Devolution to the Third Tier

• Completion date जनवरी., 2001
• Sponsor The World Bank
• Project leader Indira Rajaraman
• Focus

  This paper examines the design and outcomes of fiscal flows to the third tier from both centre and state governments, with an exclusive focus on the rural sector, where the third tier carries greater formal incrementality, and poses the more formidable challenge. Inter­governmental flows to the rural third tier are dwarfed by the massive direct expenditure by the central government targeted at rural areas amounting annually to between 1-2 percent of CDP. The most important issue from the developmental perspective therefore has to do with improving the low utilisation rates of this direct central expenditure on rural infrastructure and other schemes. By contrast, the intergovernmental provision by the Eleventh Finance Commission from the centre to rural local bodies for 2000-2005 amounts to well under 0.1 percent of CDP annually. State shares of the Eleventh Finance Commission provision are based on formulae carrying an overwhelming weightage for rural population, thus rewarding failure to control population growth, rather than progress towards decentralisation, contrary to what is claimed. The formal introduction of the third tier has not led to any convergence in the variation across states in local resource generation, pointing to the critical need for embodying incentives for fiscal autonomy and local resource generation in the design of fiscal devolution. There is clear scope for revenue additionality in the Indian fiscal system taken as a whole through transfer to the local fiscal domain of the power to tax agriculture, presently underexploited in the state domain. Finally, the absence of any central funding for local elections is a glaring omission in the approach to devolution in India, given the fiscal stress at state level, and the ever present threat to the quality of the local election process.