Getting the budget “approved” for, say, the Annual Sports Day is a rite of passage that students must go through while they are in college. It is also, if you think about it, a great way to help students understand public finance.
What percentage of your college’s revenue is due to you guys? That is, the student body, through the fees it pays, contributes what percentage of your college’s annual income? What percentage of that amount are you asking for in your Sports Day budget? What is a “fair” amount? Who is it “fair” to? How should one think about answering these questions? What framework should one use?
What if we replace the word “student body” with states, and the word college with “the central government”? What if the student body is further divided into seniors and juniors? What if the seniors are referred to as the states, and the juniors as Panchayati Raj Institutions?
Well, if you do all that, you get a “handle” as a student on thinking about a very important question: who, exactly, should actually run our country? Running a country costs money, and that money is raised by the government through taxes (duh).
Ah, but which government? Does the central government raises these taxes? Or does the state government? Or does local government raise these taxes? Who is best placed to do so, and what does best mean in this context? How have other nations done it?
What about spending this money that has been collected? Should – I’m stepping away from public finances and going back to our college for a moment – the college run annual days and festivals and sports days, or should the different programs that are a part of the college run separate events? Who is best placed to do so, and what does best mean in this context?
Thinking through the answers to these questions is one part of the study of public finance, and to aid us in our study, the Reserve Bank of India has come up with an excellent report, called Finances of Panchayati Raj Institutions. It is a most lucid report, something you can’t always accuse official reports of being, and going through it shouldn’t take you very long. And hey, incentives matter, so if you’re looking for a reason to plough through the four chapters, consider that you will have excellent economic arguments for freeing up your sports day budget!
“Hey, if our country can call for greater devolution of funds to the local level, surely the same ought to apply to our college!”
No?
Speaking of the call for greater devolution of funds to the local level, this is known as the subsidiarity principle:
Subsidiarity is a principle of social organization that holds that social and political issues should be dealt with at the most immediate or local level that is consistent with their resolution. The Oxford English Dictionary defines subsidiarity as “the principle that a central authority should have a subsidiary function, performing only those tasks which cannot be performed at a more local level”.The concept is applicable in the fields of government, political science, neuropsychology, cybernetics, management and in military command (mission command). The OED adds that the term “subsidiarity” in English follows the early German usage of “Subsidiarität”. More distantly, it is derived from the Latin verb subsidio (to aid or help), and the related noun subsidium (aid or assistance)
https://en.wikipedia.org/wiki/Subsidiarity
“…performing only those tasks which cannot be performed at a more local level”, please note. That, alas, hasn’t been the principle for much of our history, and especially so in recent times.
What percentage of our Panchayati Raj Institutions revenue comes from their own ability to administer and raise taxes, and what percentage comes from state and central governments? No reason for you to know the answer to this question, of course, but if you had to guess, what would your guess be?
Was it 1%?
What might be the implications of this, the fact that our PRI’s own-tax revenue amounts to only 1% of total receipts? Is this by design? Whose design? Why? Why can we not change this situation? What are the political, economic and administrative hurdles?
Panchayati Raj Institutions (PRI’s) receive funds from both the central government as well as the state governments. We’ll get to the central government later, but first, let’s deal with the state governments. This transfer of funds has been, well, less than desirable:
Article 243-I of the Indian Constitution stipulates the establishment of State Finance Commissions (SFCs) for recommending tax sharing between the State and the Panchayats. The initial SFC was to be constituted within one year of the enactment of the Constitution (73rd Amendment) Act in 1992. Subsequently, new SFCs were to be formed every five years. While the setting up of the sixth SFC was scheduled for all the States in 2019-20, its constitution has not been uniform and timely across States (Chart II.2.1). As per the Fifteenth CFC Report, only 4 States, namely Assam, Bihar, Punjab and Rajasthan, had established their 6th SFCs, and another 11 States had constituted their 5th SFC till then. According to MoPR, only 9 States have constituted their 6th SFC by 2022. Keeping in view the importance of SFC grants for the local bodies, the Fifteenth CFC recommended that the compliance to constitutional provisions in respect of SFC will be a necessary condition for disbursement of grants to local bodies for 2024-25 and 2025-26
https://www.rbi.org.in/Scripts/PublicationsView.aspx?id=22402
But that’s the setting up of a commission. Once these state commissions are set up, how much money do they actually share with PRI’s on a per capita basis?
Get in the habit of staring at tables like these, and thinking about what seems interesting, confusing or best of all, mystifying. What’s up with Bihar, you might ask, and that might lead you to ruminations about state capacity and development in Bihar. Or you might want to learn more about Karnataka’s state finances.
But as you can clearly see, decentralization is a bit of a mixed bag in India. Some states seem to have done a good job, others, not so much. What impact has decentralization had on the development of those states that decentralized well? What about the others? Can I read papers about this?
That’s states to PRI’s. What about the central government to PRI’s? How’s that devolution coming along?
The good news is that over the last six central finance commissions, the quantum of grants has been consistently going up (that’s the second column). But on the other hand, the gap in disbursement remains worryingly high (that’s the fourth column).
Why should this be so? The report tells us that “this was primarily due to the local bodies’ failure to meet the conditions attached to the performance grants”.
Please do spend some time going through the report, all of the four chapters. Remember, one implication of the subsidiarity principle is that PRI’s is where India’s public policy really and truly comes alive.
For India (and Indians) to grow rapidly and on a sustainable basis, we need to get our PRI’s right.
What does getting them right mean?
Finances of Panchayati Raj Institutions (PRIs) face constraints in that they have limited own revenues from property taxes, fees, and fines. Nearly all of their revenues are generated through grants from higher levels of government, underscoring their heavy reliance on the Central and State governments. Even as grants-in-aid from the upper tiers of government have aimed at mitigating horizontal disparities, the large dependence on grants can affect their financial self-reliance, limiting their ability to decide on local spending and priorities independently. Such dependence also lessens their drive to establish independent revenue streams. For sustainable growth, Panchayats need to intensify their efforts to augment their own tax and non-tax revenue resources and improve their governance. Nevertheless, the prompt establishment of State Finance Commissions (SFCs), eschewing the sizeable delays that occur currently, assumes importance. SFCs, with roles identical to those of the Central Finance Commission (CFC), and with the obligation of tabling their action-taken reports in State legislatures, can fortify the financial position of PRIs and help them in better delivery of their responsibilities for upliftment of the rural economy.
https://www.rbi.org.in/Scripts/PublicationsView.aspx?id=22404
And how do we make this happen?
The RBI report tells us that we should:
- Empower local leaders and officials (ask yourself if we are choosing to do this as a society)
- Provide them with ample and diverse funding sources
- Promote greater decentralisation
- Implement capacity building reforms
- Upgrade infrastructure
Not all of these may be directly within our own capabilities, but if you ask me, we could do with a greater impetus for the first and the third items on this list.
The RBI report ends with an exhortation:
There is also a need to raise citizens’ awareness about the functions and significance of PRIs by encouraging their increased participation in local governance processes and by enhancing people-centric administration and communication
I couldn’t agree more: please, go and read the report, and share it far and wide!
EconForEverybody 