Answer: The 73rd and 74th Constitutional Amendment Acts, 1992, provide for the Panchayati Raj Institutions (PRIs) and Urban Local Bodies (ULBs) as institutions of local self-government in rural and urban areas respectively. The institutions of local self-government (PRIs and ULBs) envisage democratic decentralization and devolution of powers at the grassroots level and detailed provisions for the funds, functions and functionaries are made in the Constitution for their effective functioning. However, the real strength in terms of both autonomy and efficiency of these institutions is dependent on their financial position including their capacity to generate their own resources. The Constitution has empowered the State Legislatures to make specific provisions with respect to the financial matters of the local self-governments. In general, they receive funds in the following ways:

• Own revenue (tax and non-tax): The PRIS and ULBs could be authorised by the State Legislatures to levy, collect and appropriate taxes, duties, tolls and fees.
• Grants from the Union government: Grants are provided to the institutions of local self- government in India by the Union government on the recommendations of the Finance Commission, which is constituted under Article 280 of the Constitution.
• Loans and grant-in-aid: State governments could provide loans and/or grant-in-aid to the PRIs and ULBs from the Consolidated Fund of the State. These grants are intended to be used to support and strengthen the delivery of basic services water supply, sanitation, sewerage and solid waste management, etc.

PRIs and ULBs also receive funds for decentralised planning and state-sponsored schemes through devolutions made by the state government. This devolution from the state government is based on the recommendations of the State Finance Commission. Under Article 243-I of the Constitution of India, the Governor of a state is required to constitute a State Finance Commission (SFC) every five years. The SFC makes recommendations to the Governor about the principles that should govern the distribution of tax proceeds – taxes, duties, levies, toll fee collected by the state between the state and its PRIs and ULBs. Further, the SFC also recommends measures for the overall improvement of the finances of the local self-governments. Despite the above provisions for strengthening the financial position of the PRIs and ULBs, they suffer from resource crunch. In India, PRIs rely overwhelmingly, to the extent of about 95%, on devolution, and their reliance on their own resources at about 6% is way below that of 40% for third-tier governments in Brazil and Germany. Further, the per capita own revenue collected by urban local governments is about 3% of the urban per capita income while the corresponding number for rural local governments is just 0.1%. Also, ULBs’ revenues are stuck at an incredibly low level of about 1% of GDP compared with levels ranging 4% to 7% in several emerging economies. Thus, there is a need to strengthen the financial position of the local self-government institutions in India. The following steps could be taken in this regard:

• Broadening their tax jurisdiction: The Standing Committee on Rural Development (Chaired by Dr P. Venugopal) recommended that the tax jurisdiction of the PRIs in India should be broadened and should include subjects such as fuel and fodder, non-conventional energy sources, rural electrification including distribution of electricity, non-formal education, small scale industries, etc., which could allow the Panchayats to make an effective plan of economic development and implement schemes for social justice. Similar provisions should be made for ULBs.
• Better monitoring of devolution of funds to local self-governments: The Central government should monitor the release and expenditure of the Finance Commission grants to ensure that there is no delay in their release. Further, local audits should be carried at regular intervals to reduce delays in Finance Commission grants to the institutions of local self- government.
• Capacity building: Capacity building of the existing staff and recruitment of new staff to fill up vacancies is necessary to make the functioning of local self-governments more efficient and for better utilisation of financial resources.
• Amendment of Article 280 of the Constitution: In its existing format, this Article is discriminatory to local bodies, as it denies them access to the ‘divisible pool of resources’, and consequently a place in the country’s fiscal framework.

The above steps are urgently required to strengthen the institutions of local self-government in India and consequently empower the citizens at the grassroots level.