The third tier was ushered in during the early nineties to create a responsive, transparent, accountable and participatory local governance system for the country. Looking back after 25 years, neither the Centre nor the States have made consistent efforts to build a viable local democracy. Quite apart from why this has happened, it is important to recognise that the lack of a reliable and regular financial reporting system is a serious lacuna in promoting credible and accountable local governments.

Financial reporting is the process of producing consistent data as well as statements that disclose an organisation’s financial status to stakeholders. In the case of governments, citizens constitute the most pertinent stakeholders. The quality of democracy and its evaluation depend a great deal on the reliability, regularity and consistency of the information placed in the public domain.

Government’s obligation

The Centre and State governments are required to present annual financial statements (Articles 112 and 202), popularly called budgets, that consist of estimated receipts and expenditure before Parliament and the State assemblies. They provide important fiscal data on a regular basis and follow the accounting formats prescribed by the CAG.

The budgets have an admirable track record as instruments of financial control and management. They are analysed not only by the Reserve Bank of India but also by a cross-section of the public, notably the media. The Economic Survey of the Union Government (first tabled in Parliament by Jawaharlal Nehru in 1962) supplements the fiscal data with a comprehensive set of macroeconomic information. The budgets and the economic surveys serve as authentic reports to the nation about the performance of the economy.

Statutory bodies such as the Union Finance Commission rely heavily on these data to arrive at policy decisions, resource sharing, grants-in-aid allocations and so on. It is surprising why the finances of local governments do not occupy a place of importance in the public finance of the country.

Along with the 73rd/74th amendments, Article 280 was also amended by adding two sub-clauses which mandate resource support by the Union Finance Commission to panchayats and municipalities on the basis of recommendations by the State Finance Commission. This underscores not only the significance of local governments in Indian federal polity but also the organic link underlying Indian public finance. Indeed, the citizens on whom rests the ultimate sovereignty of the nation live in the villages and towns and there can be no development that does not address the quality of their lives.

Economy of fiscal federalism

But the emerging political economy of fiscal federalism in India since 1991 has considerably weakened the third tier despite the rhetoric about cooperative federalism reinforced by competitive federalism terms which are conceptually antithetical.

Chapter 14 of Economic Survey 2016-17 is titled ‘From competitive federalism to competitive sub-federalism: cities as dynamos?’ But these ‘dynamos’ are part of urban local governments which necessarily should have a regular and reliable fiscal and economic database. The Indian polity where these ‘dynamos’ are set to work could turn out to be a powerful factor in widening spatial inequality. Indeed, recent economic surveys acknowledge the growing income and wealth inequality in India, as well as increasing disparities in the accessibility (in terms of availability and affordability) of such vital services as primary healthcare and primary education.

No citizen should be denied minimum comfort because of choice of location. How can a democracy ignore the spatial dynamics and the growing divergence in income, wealth, health, education and other infrastructure facilities? Local governments in India are not equipped and empowered to generate a reliable set of data which will enable proper monitoring of spatial reality at the micro level — the basis for arriving at relevant macro-level policy choices.

Undoubtedly, local government budgets can serve as an instrument of financial control and supply a reliable and continuous data. This is not happening in India, not even in Kerala which has launched from April,1, 2011 an Accrual based Double Entry Accounting system in all the 1209 local governments following the series of financial reforms initiated by the Eleventh Finance Commission. Most local governments in India are shifting towards the accrual system of accounting from the cash system. It is also claimed that local governments in India are computerised.

The budget mechanism

But the Budget is an acknowledged mechanism to ensure accountability and financial control, and which should include actual income and expenditure statement for the preceding year, income and expenditure estimate for the current year, revised estimate for the current year, income and expenditure estimate for the coming year, and an analytical report on the financial position of the preceding year. THe Budget is also meant to continuously compare actual with budget numbers for the achievement of targets. That these are not happening in the local governments is an ominous trend.

The passing of budgets by local bodies before March 31 every year is routinely done as a statutory requirement. Budgets and annual financial statements are not integrated; the numbers in these documents seldom tally and remain as disconnected exercises. This is fertile ground for supporting rent-seeking regimes. The basic principle of auditing that public money should be spent with wisdom, faithfulness and efficiency is violated with impunity.

In sum, the best way to improve the present situation is to introduce budgeting and budgetary control at the local level as essential components of fiscal management, along with compliance of the accounts and audit guidelines prevailing in the country . If all the District Planning Committees (assuming that they are duly constituted in all the districts as mandated in Article 243ZD) produce a district economic survey along with budgets working as operational fiscal tools, it is possible to generate and build a standardised fiscal database fulfilling all the mandatory requirements as well as an economic data complementing that. Will the Centre step in and initiate a reform process?

The writer is an honorary fellow at the Centre for Development Studies, Thiruvananthapuram