This is part of a special series of articles by the country’s foremost voices, ahead of Union Budget 2024, aiming to draw attention to the critical reforms that can help India in its journey to become a developed nation by 2047.
The fictional village of Phulera is back on our screens. The third season of the streaming series Panchayat has once again brought to life the rustic charm, the petty quarrels, the human drama in this little village in Uttar Pradesh. The tales from Phulera also tell us a lot about an issue India needs to grapple with in the coming decades—the ability of the state to work efficiently at the many points where it actually deals with citizens on a daily basis. This is the frontline of the state: the world of the ration office, the police constable, the public health centre, the sanitation inspector, the school teacher and the panchayat secretary.
The three seasons of the series provide tantalizing glimpses of how a rickety state struggles with issues such as welfare payments, sanitation programmes, installing solar panels, rural roads and much else. Phulera is an archetypical village in the Gangetic belt, but building an effective state at the urban frontline is as important as doing so at the rural frontline.
Indians are inevitably moving in larger numbers to cities, making us a predominantly urban society in the years ahead. And it is not just a matter of how many people will live in cities. Large urban centres drive economic growth, by bringing together skills, capital and ideas through a dense network of interactions.
In his new book, Accelerating India’s Development: A State-Led Roadmap For Effective Governance, Karthik Muralidharan of the University of California San Diego writes that service delivery in a federation such as ours should primarily be a local government function. “One of the most important governance reforms we need is to shift responsibility for service delivery from states to local bodies.” He also points out that the urge to give local governments autonomy in service delivery should be balanced by the risk of capture by local elites. More broadly, there are three core issues here.
First, most local governments are financially emaciated. They depend on transfers from the state government or the Union government for a big portion of their budgets. A pioneering study of municipal budgets by the Reserve Bank of India showed that city governments directly generate only ₹65 out of every ₹100 that goes into their budgets. The rest comes from financial transfers.
Some of this is understandable. The political reason is that most large countries assign more taxation powers to higher levels of governments, perhaps because the distance from local interest groups makes it easier to design effective tax policy. The economic reason is that a lot of income is generated from nationwide economic activity even though it may be booked at the place where an individual or company resides.
There is a compelling case for strengthening the finances of cities. One option is for cities to collect more money through property taxes, user fees, parking charges and the like. However, these are all inelastic sources of revenue, which do not automatically grow in tandem with the underlying economy.
Cities need more elastic sources of revenues. One option is to assign a small proportion of the money collected through the goods and services tax (GST) directly to cities, rather than route them through state governments, at least for the large cities to begin with. GST is a destination tax, so assignment should not be a major problem.
Second, the effectiveness of delivery of services by the frontline of the Indian state also depends on clarity of purpose. The Indian Constitution was amended in 1993 to recognize the third tier as a formal part of the constitutional structure, in addition to the Union and state levels. There was also an attempt to carve out some specific tasks for local governments. For example, the 12th Schedule that was added to the Constitution after the 74th Amendment identifies 18 functions for city governments. These range from some that are very specific to cities (urban planning, land use, parks) to the more generic (planning for economic development, promotion of cultural activities, protection of weaker sections of society). Similarly, the 11th Schedule specifies the responsibilities of village panchayats in 29 matters.
A lot of the tasks that local governments are expected to perform are also linked to national requirements such as citizen safety, public health and school education.
The result is a spaghetti bowl of exclusive as well as derived tasks. Local governments end up having limited autonomy to take independent decisions, even in the tasks that are constitutionally assigned to them. Nor do they have the freedom to hire adequate staff. Most of the people working at the frontline are employed by state governments. They also tend to report to seniors in that hierarchy rather than local elected officials. The incentives are thus misaligned in many cases.
Third, the staffing distribution of the Indian state across its three tiers—Union, state and local—is very different from other large countries such as the US and China. Devesh Kapur of Johns Hopkins University has shown how most government employees in those two countries are concentrated in either the central or local levels. State government employment is much less.
In India, it is the state governments that have the most staffing strength; the Union and local governments are relatively understaffed. “No matter how carefully designed development programmes are designed by national bureaucracies, ultimately their performance on the ground hinges on how effectively they are implemented by local bureaucracy at the frontline,” writes Kapur, citing the work of Harvard University development economist Lant Pritchett.
A more balanced federal design across the three tiers of the Indian state would be a better reflection of the concerns of 21st century India, as it climbs up the development ladder.
A simple way to think about this is as follows: The Union government stays focused on policy frameworks as well as national public goods; state governments pour their energy into local public goods as well as competing for investments; and local governments raise their game at the many points where development programmes touch the lives of citizens every day. Phulera is a microcosm of that story.
Niranjan Rajadhyaksha is executive director at Artha India Research Advisors.
