How India can foster economic democracy

Decentralisation has long been recognised as an efficient instrument for promoting economic democracy, and delivering services to meet the needs of people. There are three different channels for decentralisation — political, administrative and fiscal. Political decentralisation promotes trust and cooperation between government agencies and citizens. Administrative decentralisation enables authority to be shared so that local governments can design and implement programmes more appropriate to local conditions, than a centrally designed one-size-fits-all system. Fiscal decentralisation enables revenue-raising and expenditure powers across different levels of government to create a level-playing field.

India has made huge progress with political decentralisation, but challenges remain with fiscal and administrative decentralisation. This is reflected in huge spatial disparities between lagging and leading regions, with more than 100 million people living in poverty in the lagging regions. India needs a level-playing field to promote economic democracy.

Although India is politically decentralised, fiscal decentralisation remains lopsided. State governments are responsible for spending more than 50 per cent of total government expenditure, but most of it goes towards interest payments and salaries, leaving little room for development initiatives. Lagging States do receive higher per capita fiscal transfers, when these transfers are explicit transfers. However, discretionary transfers largely go the richer States.

Fertiliser subsidies, for example, benefit richer regions much more than poorer regions. There is a great deal of room for creating a level-playing field between leading and lagging regions through fiscal decentralisation.

As with fiscal decentralisation, the extent of administrative decentralisation varies across different services. There is considerable variation in whether execution and supervision are both decentralised. For instance, India has devolved the execution of most education programmes to the sub-national level, but supervision in many cases is retained at the national level.

Unfortunately, the impact of administrative decentralisation on many service delivery outcomes is ambiguous. The advantages of better local information and monitoring have been offset by weak capacity, local capture and corruption. Empirical evidence does not support a consistent positive relationship between the degree of administrative decentralisation and investment in people’s education and health, which is the best indicator of public service delivery.

With a population of around 1.3 billion people, India is the world’s largest democracy. It has established a three-tier system of elected local governments at district, block, and village levels. In 1992, India approved 73rd Constitutional Amendment Act that encompassed a set of reforms implementing a nationally-standardised and decentralised system of local government.

These reforms, also known as the Panchayat Raj, not only accelerated decentralisation but also began the process of eliminating gender inequality, by requiring one-third seat reservation for women in the local governance bodies. This has scaled up women’s economic participation. The empirical evidence on political decentralisation and human capital outcomes is also mixed.

Challenges

India needs to unbundle the decentralisation agenda to promote economic democracy — shift from scheme-based transfers into broad programmes to increase rural livelihoods, and provide resources and expenditure responsibility to attract and hold the interest of the local community.

There are many challenges facing fiscal decentralisation. Some transfers from the Central Government to sub-national governments tend to be skewed toward richer States, the most illustrative examples being India’s discretionary schemes. Fiscal transfers would benefit from more explicit rules, greater transparency, and ensuring that interstate transfers do not act as a disincentive for fiscal responsibility by sub-national governments.

Simply directing financial resources to backward regions may not be sufficient and will need to be complemented with improved capacity, accountability, and participation at the local level, so that lagging regions can make full use of these resources. Given the fast pace of India’s urbanisation, the decentralisation agenda need to be better aligned with the urbanisation agenda. Most cities are financially broke and not able to address the challenges they face — availability of clean drinking water, public transport, treatment of waste water and effluents, or affordable housing.

More fiscal resources are needed to support rural structural transformation. Under the present arrangement, panchayats make no contribution to the design of the schemes and are given little discretion in implementation. They also have limited autonomy over their staff. The expenditure assignments need to be spelled out in detail so that this results in local governments having autonomy and sufficient resources to provide meaningful services to their communities.

Earmarked transfers designed by higher levels of government should not dominate local government finances. It is important to begin developing these capacities to improve economic democracy at the local government level to deliver local public goods.

The writer has worked for World Bank, and is a Senior Fellow at Pune International Development Center

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