Local Governments and Fiscal Management
Local governments have been constitutionally mandated with the enactment of the 73rd and 74th amendments in 1993. Sadly, the Constitution only provides for over-structured and underpowered local governments. The results are mixed. The role of local governments as schools for democracy is well recognised. Chittaranjan Das, Vallabhbhai Patel, Jawaharlal Nehru, Subhashchandra Bose, Prakasam Pantulu and several other stalwarts started their political careers in local governments. But their importance in reducing corruption and improving the economic management has not been adequately recognised.
Let us examine the relationship between fiscal deficits and centralization. Our combined fiscal deficit remains pretty high at about 10% of GDP despite valiant efforts of successive finance ministers. It is no surprise, because there are no magic wands to control deficits. We must either raise taxes, or reduce subsides or control wages. Selling PSUs does not make a dent in deficits because even the modest projections of sale revenues of Rs 10,000 crores annually have never been realized, and even if realized will hardly make a difference. And in any case, deficit reduction is not an end in itself. Improved services and quality infrastructure are the goals we should seek as better value for the money spent.
In a centralized government it is impossible to persuade people to pay more taxes. When higher taxes show no prospect of better services, people devise ingenious ways of avoiding taxes. Despite public expenditure accounting for 28% of GDP, the allocation for education, health care and social security is a meagre 5% of GDP, as opposed to 25% in OECD countries. Naturally people do not see how their tax money is benefiting them. Hundred rupees in their pockets are far more wisely spent than taxes in a centralized government. And when people have to pay bribes for the simplest of services, it is hard to summon the will to pay more taxes.
Desubsidization is easy to prescribe, but difficult to deliver in a poor country. The poor family that gets real income of Rs 100 every month as food subsidy cannot give it up to fill the fiscal hole. This is true everywhere. When food subsidies were sought to be drastically reduced in Poland in early 80's, it led to food riots, and eventually paved way for the rise of Solidarity under Lech Walesa and collapse of communism in Eastern Europe. But if such subsidies are administered locally, and people see alternative uses for their money, they are more likely to accept desubsidization. If the amount saved by desubsidization can be locally used for building roads, construction of toilets, improving health facilities etc., people can then see where the money is going and are willing to give up consumption subsidy in order to build a capital asset or improve the quality of life.
As to wages, we cannot realistically reduce this burden. In reality the number of government employees as a proportion of population (1.3%) is not high by global standards. Wages are not translated into public services because of two reasons. First, most employees are wrongly deployed. We have too few teachers, health workers, judges and policemen, and too many clerks, peons and drivers. Second, in a centralized milieu employees are utterly unaccountable. Authority has never fused with accountability, and we have a system of alibis for nonperformance. Only in a local government can we retrain employees and re-deploy them in desired sectors, and institute effective systems of accountability.
Our fiscal crisis, misgovernance and corruption cannot be addressed by finance ministers. The problems are far more fundamental, and need restructuring of our governance apparatus. Local governments will not automatically reduce corruption, nor will they promote better leadership overnight. The promiscuous administrative and political culture is bound to permeate into local governments too. But as employees are held to account locally, we can check corruption. And as the citizen sees the link between his vote and public good, better quality of leadership will start emerging. But it takes patience, faith and painstaking institution-building.
Kerala is showing us the way. In addition to wages, 40% of all plan funds are placed at the disposal of local governments. Our fiscal federalism is on reasonably sound footing. Some 42% of central revenues are now transferred to States - 29% as financial devolution, and the rest in the form of plan assistance and centrally-sponsored schemes. The States are demanding 50%, but the gap between the demand and today's devolution is not large. The real failure lies in transferring of functions, funds and functionaries from states to local governments. Articles 243G and 243Wand the 11th and 12th Schedules of Constitution listing subjects to be dealt with by local government do not have the same force as the Seventh Schedule providing for clear and distinct jurisdiction of States.
An average district in India is larger than 80 nations of the world, and our larger States are bigger than 90% of the countries. We need to recognize the importance of local governments. Elections for Mumbai and Hyderabad Municipal Corporations are now being held. Mere elections of new mayors and councils will not do. We should redesign institutions and improve governance to give good value for our money. Only then can the fiscal crisis engulfing us be averted. It is high time we recognized that all governance is about people and all politics is local.