Bring government closer to people

Source: The post is based on the article “Bring government closer to people” published in Business Standard on 21^st April 2023.

Syllabus: GS 2 – Governance

Relevance: concerns associated with local government.

News: India is preparing to become an advanced economy in the next 25 years.

What are the features of advanced economies?

A distinguishing feature of advanced economies is their significant allocation of revenues and responsibilities at the local government level. 

These include primary education, health care, basic law and order, and civic infrastructure — sewage, water supply, road maintenance and local zoning and regulations.

How much does India currently spend at the state and local level of government?

India’s share of sub-national (state plus local) spending is at 60 percent of total spend, which is very high at its level of development.

Other large federal states spend less. For example, Brazil spends around 50 percent while the United States around 40 per cent. Only Canada and China spend more than 70 per cent at the subnational level. 

What are the concerns with this devolution of money?

This devolution of money was proposed by the 14th Commission and was accepted by the 15th Finance Commission. 

However, simply shifting resources from the Centre to the states will not be of great help unless it reaches the lower levels of government.

For genuine devolution, the focus must shift to looking at ways to ensure more resources flow to local institutions, such as panchayats and mayors.

This is because many smart city projects are hampered by the inability of city mayors to deliver on their components of the scheme.

Further, the cost of delivering services at the same time improves and is made more effective and monitorable.

What are the concerns with the local government?

India’s local government spend is less than 4 percent of total government spending. This share is much smaller than in most advanced economies.

For example, spending by the local government in China exceeds 50 percent of total spending by the government.

Hence, India must prepare a road map for greater devolution from state-level spending to local governments and raise more local government revenues.

How can the revenues of local government be increased?

The best way to allow local governments to raise their own resources is an increase in property taxes and higher user fees.

Objections to higher property taxes from elderly owners can be handled through different means such as grandfathering clauses that exempt them during their lifetime.

At present, India has a very low property tax rate, accounting for around 0.5 percent of its total tax revenue and only a little over 0.1 percent of GDP.

Whereas the OECD countries on average collect about 5.6 percent of total tax revenue in property taxes and the US, UK and Canada at over 11- 12 per cent at the highest levels.

What can be the way ahead?

The 15th Finance Commission provided grants to states subject to them updating their property tax rates and improving collection.

This route could be used to discuss raising rates by the upcoming 16th Finance Commission to increase local government resources.