Local Government Finance: A Review of Fiscal Decentralisation in India

Local governments in India are an integral part of the governance structure. The provision of public goods and services is entrusted with the local bodies due to their superior knowledge of specific public needs and regional requirements. Various functions and responsibilities have been devolved to local governments through 73rd and 74th Constitutional Amendment Acts of 1992 to catalyse the development process. This paper aims to analyse and review the process of fiscal decentralisation. Various researches and empirical studies have been reviewed to develop insight into the effectiveness of fiscal decentralisation in augmenting local governments’ finance and ensuring efficient service delivery. The major themes that emerge from extant literature suggest that for vast countries like India, fiscal decentralisation does not significantly contribute to economic growth. The decentralisation policies have both positive and negative implications, on the positive side, decentralisation improves performance and service delivery, while on the negative side, it increases fiscal imbalance. To utilise fiscal decentralisation as a catalyst of development, there is a strong need to enhance the resources base of local self-governing institutions along with ensuring accountability and adequate observations by higher tiers of government. Local governments need to adopt innovative financing mechanism to fill the resource gap and reduce their reliance on fiscal transfers.