74th Amendment and Local Governments in India

By Anand Sahasranaman, IFMR Finance Foundation

This is the beginning of a series of blogs on the Municipal Finance scenario in India. In the first post we look at the 74th Constitutional Amendment Act, the rationale behind it and its intentions.

A municipal or local government is the layer of government that is closest to the people. The principles of fiscal equivalence1 and correspondence2 provide a strong rationale for decentralisation on the grounds of efficiency and accountability. Correspondingly, the principle of subsidiarity3 makes the case for transfer of revenue generating powers to local governments so as to respond to their clients’ needs and provide appropriate services. The literature clearly indicates that local governments are in the best position to be able to communicate with and understand the needs of the community that they represent and that they be given the responsibility to provide basic social and infrastructure services to their constituents. The responsibilities and powers of local government need to be established in a well-defined policy and legislative framework.

The 74th Constitutional Amendment Act (74 CAA) enacted in 1993 was a critical piece of legislation meant to herald a fundamental shift in the philosophy of governance in India, by articulating a vision of decentralised power and responsibility through the provision of constitutional status for urban local governments . All state governments passed enabling legislation to translate the provisions of 74 CAA into reality. These acts laid down the provisions for the devolution of funds, functions and functionaries to enable Urban Local Bodies (ULBs) to perform their duties. Since there is a wide scope of functions devolved to local governments (such as urban planning, water supply, public health, fire services and slum improvement among others), the 74 CAA envisioned that assuring regular and predictable funds flow to ULBs would be critical in enabling them to fulfil their mandate. Mirroring the Central Finance Commission (CFCs), it proposed the creation of State Finance Commissions (SFCs) every five years to decide on the grants-in-aid for ULBs. In addition, the 74 CAA and enabling state level legislations devolved a set of financing levers – taxes and fees – that could be utilised by the ULBs to generate revenues internally.

With the passage of the 74 CAA, local governments were meant to take on more of a developmental character, with direct accountability to citizens. The act envisages long term planning for social and infrastructure services to be done at the local government level and then consolidated as master development plans at the district and metropolitan levels. Among other important provisions of the 74 CAA were adequate representation of women and weaker sections of society in local governments, and regular conduct of municipal elections every five years.

Although the 74 CAA was expected to create a basis for accountable and transparent local government, the reality over the past 20 years has not matched these expectations. In subsequent posts in this series we will explore different aspects of the municipal framework – funds, functions and functionaries – in greater detail to understand the Indian experience better.

1- The principle of fiscal equivalence states that an overlap of the benefit area and political jurisdiction ensures the optimal provision of public services
2- The principle of correspondence states that the jurisdiction that determines the level of provision of a good should precisely include the individuals who consume that good
3- The principle of subsidiarity states that taxing and spending should be exercised by lower levels of government unless a convincing case can be made to the contrary