The Local Governments of the nation play a big role in the welfare of its citizens. However, most of them lack the revenue resources to meet their functions. Though there are constitutional powers given to the Local Governments for mobilisation of revenue, many of them are not able to properly implement them. This article describes the mechanism through which funds are transferred to the lower tiers of the government and why it is important to devolve the funds to the local governments.
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By Anagha Vinod and S Aswathi Mohan

Introduction

Fiscal decentralisation or fiscal devolution is the transfer of expenditure and revenue responsibilities from higher levels of the government (the Union Government in the case of India) to lower levels of the government (the state and the Local Governments [LGs] in the case of India). In a federal system (a system where the government is divided into more than one tier), fiscal decentralisation becomes important because there will be much more efficient utilisation of resources by a decentralised government as compared to a centralised one, as local authorities would be more aware of the problems faced by the local people. Oates (1972) theorised that the provision of services from a decentralised government will lead to an increase in the welfare of the citizens, as the decentralised governments deal with a fewer population they tend to have the information advantage and hence can respond to the needs of the population quickly than a centralised government.

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Anagha Vinod and S Aswathi Mohan were Research Interns at Centre for Public Policy Research. Views expressed by the authors are personal and need not reflect or represent the views of Centre for Public Policy Research.

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