Fiscal Reform Needed For Panchayati Raj Institutions to Work Better

The complex intergovernmental fiscal transfer system is neither designed nor operationalised to fulfill its own vision of devolution to panchayats.

Picture a gram sabha in progress where 150 out of the 3000 odd voters in a gram panchayat are packed in a room of a not so remote village amidst the blistering landscape of Rajasthan. The room is half filled with women seated uniformly with gunghats covering their faces. Not a single woman speaks throughout a meeting that was presided upon by a woman pradhan. After an hour or so a frail old man pipes up, complaining vigorously about inaction over a water pipeline whose request was placed 15 years ago. When the sarpanch finally interjects in favour of the old man, the representative from the line department says the case will be referred to the chief engineer. No timeline or resolution process is defined.  

This was the morning of April 24, 2016 – also known as National Panchayati Raj Day. The day came to a close with a speech made by Prime Minister Narendra Modi, who addressed gram sabhas across the country. His opening remarks were “I want to leave a legacy. People should talk later that I did this for the villages. I urge panchayat representatives to initiate transformative changes in villages and bring a positive difference in society during their terms.”

Need for institutional reform

While the prime minister exhorted the gram panchayats to take upon themselves to reform local governance, there was little mention of the urgent need for institutional reforms at the state and Central level, the absence of which are hollowing out the potential of the Panchayati Raj Institutions (PRIs).

India’s institutional design for decentralisation is intriguing. Behind the de jure commitment to political decentralisation, the practice has been to generously endow PRIs with functional responsibilities while starving them of fiscal streams necessary to perform these tasks. While this imposes a hard budget constraint, the controls are akin to a principal and agent instead of a generic institutional check on irresponsible local spending. When functional assignments are not matched by fiscal devolution, local expenditure often occurs through implementing entities apart from PRIs, such as line departments and parastatals. This leads to several fiscal streams operating in parallel, with accounting complexities that make it difficult to assess the extent and nature of local expenditure.

For example, a study conducted by the Accountability Initiative across 30 gram panchayats in Kolar district of Karnataka (considered as a trailblazer in democratic decentralisation) concluded that the complex intergovernmental fiscal transfer system is neither designed nor operationalised to fulfill its own vision of devolution to panchayats.

From a design perspective, only 3 of the 25 functions devolved to gram panchayats in Karnataka had budget heads but no monetary assignments. In the fiscal year 2014-15, the extent of funds eligible for devolution but retained by the state amounted to 269 schemes worth 22,596 crore rupees, or 15% of the total state budgetary outlay of 1,50,379 crore rupees. Amongst the funds devolved to PRIs, more than half the schemes were less than 5 crores rupees causing administrative inefficiency and accounting overloads.  

From an operational perspective, 97% of the expenditure incurred in a gram panchayat whose average budget envelope is six crore rupees is made by a spectrum of entities (state line departments in the district and block, the zilla and taluk panchayat, local area development funds and parastatals) other than the gram panchayat. As spending authorities do not maintain details of expenditure at the panchayat level, the gram panchayats have no inkling of either the nature or extent of expenditure made by these various entities in their political jurisdiction.

As part of the Gram Uday campaign, ‘village farmer assemblies’ were organised in gram panchayats where information regarding agricultural schemes was provided to farmers. Mere recitation of schemes that citizens are eligible for is of hardly any use when the agriculture department at the district and block are unaware of fiscal flows across these schemes. In the absence of such data it is difficult to fathom how an ordinary citizen (most often a poor illiterate farmer) can navigate through the complex maze of the system to avail his or her benefits. It is also unclear how PRIs with such weak designs and fiscal capability are expected to acquire the status of viable, responsive people’s bodies.

The findings of Accountability Initiative’s study in Karnataka are not unique to the state, but point to an endemic issue prevalent across the local government management system of this country. However, this does not mean that the rosy image of a gram sabha having energetic discussions on optimum utilisation of funds as envisioned by the ‘Gram Uday se Bharat Uday’ campaign is unattainable.

PRIs need to know their fiscal rights and duties

For reform measures to be successful, along with the ‘political will’ rhetoric what we need is ‘administrative will’. For instance, as of today there is no mechanism in any Indian state (including decentralisation champions like Kerala and Karnataka) where implementing entities (at the district and block level) record their allocations, releases, and expenditures down to the granularity of each gram panchayat. This status quo explains the poor financial planning and unclear assignment of responsibilities that persist through the service delivery chain of our government system.   

Integral to achieving the legacy of devolution and development that Modi envisages needs far more than a 15 day campaign. What it needs is the direction for employing a realisable mission that integrates central and state public finance management systems across all tiers of governance and reports such information at the first mile of political governance i.e. the gram panchayats. Only when PRIs understand their fiscal rights and duties will they have the platform to provide higher standards of participatory planning, transparency, accountability and local self-government. Only then an evidence-backed discussion on the real issues of the efficacy of the three F’s (functions, functionaries and funds) of decentralisation can take place.

Else, as the sub-divisional magistrate managing the gram sabha we visited said, “these campaigns initiated in Delhi are ways of keeping us busy while taking our focus away from issues that actually need our time and effort.”

Padmapriya Janakiraman is Senior Research Associate at Accountability Initiative, Centre for Policy Research