Decentralisation, when left incomplete, embodies a deeper philosophical contradiction: the illusion of autonomy without the substance of power. True decentralisation means more than a technical redistribution of functions. It is a fundamental reordering of authority, responsibility, and legitimacy.
A system that claims to empower lower tiers of government but denies them the means to act creates a Kafkaesque structure where responsibility is dispersed, but control remains concentrated.
India stands at this crossroads. The 73rd and 74th Constitutional Amendments promised a new era of local governance, yet most States have retained a vice-like grip over financial resources and bureaucratic control. Panchayats and municipalities (ULBs) are expected to plan, implement, and govern, but without fiscal independence or administrative authority, they remain supplicants rather than sovereign actors.
Even within State governments, power is often nominally decentralised among institutions but functionally monopolised by the political and bureaucratic elite. This unfinished agenda does not merely lead to inefficiency; it erodes the very idea of governance as a participatory, dynamic force. Decentralisation, in its true form, is not about decongesting power but about reimagining it — creating a system where authority is not merely passed downward but is rooted in legitimacy, capability, and real autonomy.
The 11th and 12th Schedules of the Constitution, which outline the powers and responsibilities of Panchayats and Municipalities, are outdated and fail to reflect the evolving governance needs of India.
A glaring example is the exclusion of sewage management from the jurisdiction of Rural Local Bodies (RLBs), effectively meaning that in areas under their governance, there is no structured sewage system. This gap becomes particularly problematic in regions that are functionally urban but remain administratively classified as rural.
Since these areas continue to be governed by RLBs, essential urban infrastructure and services fall into a governance void — no specific body is accountable for their provision. As a result, the responsibility for such services informally shifts to the district administration, making access to basic infrastructure contingent on bureaucratic discretion rather than institutional mandate. This lack of clear jurisdiction undermines service delivery, leaving residents dependent on ad-hoc administrative decisions rather than a structured governance framework.
Recent progress
Further, Article 243I mandates that every State to constitute a State Finance Commission (SFC) every five years to review the financial position of Panchayats and recommend the sharing of taxes, duties, tolls, fees, and grants-in-aid from the state’s consolidated fund.
The Conformity Acts of the Constitutional Amendment Act (CAA) outline the commission’s composition, member qualifications, and selection process, with its recommendations presented to the state legislature.
Over the past 30 years since Part IX was incorporated, significant progress has been made, including the enactment of Conformity Acts, regular Panchayat elections, and the formation of multiple generations of SFCs in several States.
However, despite these advancements, Panchayats across most States remain financially constrained, limiting their growth and effectiveness, a challenge that has intensified with their expanding roles and responsibilities post-CAA.
One should read the recently released “Status of Devolution to Panchayats in States Index” 2024 by Ministry of Panchayati Raj and Indian Institute of Public Administration and authored by VN Alok.
Apart from the numbers, it also highlights the problems with the existing system. There are three key problems with Panchayat Finances.
Financial issues
First, inadequate own revenue generation and low fiscal autonomy remain critical challenges. Panchayats primarily rely on property tax, which is often poorly administered, leading to low collection efficiency. Own-source revenue contributes only 5-10 per cent of their total expenditure, making them heavily dependent on State and Central transfers.
Additionally, revenue collection varies widely across States, with some Panchayats authorised to levy professional and entertainment taxes while others lack such powers. Assigned revenues, such as surcharges on stamp duties and vehicle taxes, are often deducted by States, further limiting Panchayats’ financial capacity.
Moreover, the absence of robust mechanisms for tax assessment and enforcement leads to under-reporting of liabilities, reducing actual collections. The failure to strengthen local revenue mobilisation leaves Panchayats unable to finance even core services like drinking water, sanitation, and rural roads, let alone broader economic and welfare functions.
Second, weak devolution of funds, excessive dependence on grants, and inefficiency in fund utilization further undermine Panchayat finances. Although the Constitution mandates SFCs to recommend fund devolution every five years, many States delay their formation or fail to implement their recommendations.
Consequently, State governments provide ad hoc and unpredictable transfers, disrupting financial planning at the Panchayat level. Moreover, most financial support comes through Centrally Sponsored Schemes (CSSs) such as MGNREGA, Jal Jeevan Mission, and Swachh Bharat Mission, which are tightly controlled and limit Panchayats’ flexibility in allocating resources.
Additionally, many States continue to control functions like sanitation and water supply through parallel agencies or parastatals, preventing Panchayats from directly managing resources. Even when funds are allocated, bureaucratic delays and procedural bottlenecks hinder timely utilisation, leading to inefficiencies in service delivery.
Third, institutional weaknesses, lack of borrowing power, and poor financial transparency exacerbate Panchayats’ fiscal challenges. Most Panchayats lack the technical and administrative capacity to assess and collect taxes efficiently, further weakening their financial base.
While the Local Authorities Loans Act (1914) allows local governments to borrow, Panchayats rarely do so due to lack of creditworthiness and legal clarity on their borrowing powers. The absence of clear financial accountability mechanisms results in inefficient fund utilisation, corruption, and a lack of transparency in public spending.
Many States do not publish Panchayat-level financial data, limiting public scrutiny and weakening democratic accountability. Additionally, the continued dominance of State governments over local governance restricts the effective devolution of power and resources.
The issue goes beyond finances — we need a radical rethink of how we provide basic necessities. The rigid rural-urban binary is stalling development. Would reclassifying rural areas as urban improve outcomes? Not necessarily, given the state of our urban local bodies. The real question: Should we overhaul the 73rd and 74th Amendments to build a governance model that actually works?
The writer is a public policy professional