Fiscal Decentralization to Rural Governments India Fiscal Decentralization to Rural Governments Geeta Sethi Washington, DC March, 29 2004

What is India Federation of 28 states. Over 1 billion people, 700 million live in villages, almost half of world’s poorest. 400 ethnic groups, and about as many languages. Fast growing economy, increasing rural/urban disparities. Fiscal deficit in double digits (10%).

Decentralization in India Two Constitutional Amendments, urban and rural in 1992. Central Finance Commissions State Finance Commissions State Acts

Intergovernmental structure All sub-national governments are directly elected; There are seats reserved for women, SCs and Sts Central Government States (28) Average Pop. 36.3 millions URBAN LOCAL BODIES: 28%t of total population RURAL LG: Raj Panchayats 72% of total population District–ZP (515) Average Pop. 1,351,228 Block or Taluk–TP (5,930) Average Pop. 117,349 Village–GP (240,588) Average Pop. 2,892

Fiscal Decentralization Study Karnataka Kerala Population 52 million 31 million # of rural local governments 5870 1157 # of Zilla (districts) Parishads (ZP) 27 14 # of Taluk (block) Panchayats (TP) 175 53 Municipalities # of Gram (village) Panchayats GP (average population) 5659 (6,137 inhabitants) 991 (23,810 inhabitants) Total elected number of rural governments 84,886; 44 % women; two local elections and two SFCs since 73rd Amendment 12,117; 33 % women two local elections and two SFCs since 73rd Amendment Devolution of subjects to panchayats All 29 subjects All 29 functions, but functionaries and funds devolved for only 15 functions. Channeling of public expenditure through panchayats About 20 percent About 30% of plan expenditure and 18% of total state budgets

Problems with the current system Gram Panchayats are the relevant LGs in terms of revenue powers and discretion. But, smallest fiscal role Transfer system is scheme based (tied funds), non-transparent, unpredictable, non-equalizing. Unclear expenditure assignments and overlaps between different tiers. Revenue raising powers not effectively used in both states.

Allocation of transfers among rural governments Karnataka Kerela

Reform Agenda Emerging from the Study C/S/L (urban and rural) inseparable on fiscal issues—a need for a fiscal analysis unit. Information and Monitoring systems Financial Management systems updated. Improvement of enabling policy environment. Improved Transfer system.

How will the States finance this Reform Agenda Bank financing for the transition costs of reforms. A Fiscal Cell Redesigned transfer system Improved financial management and information systems (including for monitoring of service delivery)

Another ESW:Improving Accountability relationships for rural people