Fiscal Decentralisation in India: Evolution, Amendments, and Committees

Money decides whether a local government can actually govern. A municipality or a panchayat may have the constitutional right to plan roads, run schools, and supply water, but without funds and the freedom to spend them, those powers stay on paper. This tension between responsibility and resources sits at the heart of fiscal decentralisation in India. Understanding how it evolved, which committees pushed it forward, and how finance commissions try to make it work tells us a great deal about how power is shared between the Centre, the states, and the institutions closest to ordinary people.

What fiscal decentralisation actually means 🔗

Decentralisation has three parts that often get confused. Political decentralisation gives local bodies elected representatives. Administrative decentralisation transfers functions and staff to them. Fiscal decentralisation is the third and most difficult piece: it transfers the authority to raise revenue and spend it. A common criticism is that India devolved responsibility to local bodies but held back the matching revenue, leaving them dependent on higher tiers of government. In practice, fiscal decentralisation is measured not just by how much money reaches a panchayat or municipality, but by how much of that money the body can decide to spend on its own priorities.

Evolution of fiscal decentralisation in India 🔗

The idea of strengthening local finances is older than the Constitution’s local-government provisions. The story moves through early enquiry committees, a foundational report in the 1950s, and finally two amendments that changed the legal landscape.

Early thinking on local finances 🔗

The Local Finance Enquiry Committee (1951) was among the first official bodies to examine how municipal and local-body finances were structured in independent India, and it laid groundwork for thinking about which taxes should belong to local governments. A few years later, the Balwant Rai Mehta Committee, appointed in 1957 to review the Community Development Programme and the National Extension Service, recommended what it called democratic decentralisation and proposed a three-tier structure of village panchayats, block-level panchayat samitis, and district-level zila parishads. This report is widely treated as the origin of the Panchayati Raj system, even though the finances to back it remained weak.

The 73rd and 74th Constitutional Amendments 🔗

The turning point came in 1992. The 73rd Amendment gave constitutional status to Panchayati Raj Institutions (PRIs) in rural areas, while the 74th Amendment did the same for Urban Local Bodies (ULBs) such as municipal corporations, municipal councils, and nagar panchayats. Before these amendments, panchayats and municipalities depended almost entirely on state legislation and could be dissolved at the convenience of state governments.

The amendments added the Eleventh and Twelfth Schedules, listing 29 subjects for panchayats and 18 for urban bodies, covering matters like water supply, sanitation, public health, and local planning. Crucially for fiscal decentralisation, they introduced a mechanism to review local-body finances at regular intervals. Yet the design left a lot to the states. The actual transfer of funds, functions, and functionaries – often called the “three Fs” – was left to state legislatures to decide, which is why the depth of devolution varies sharply across India. Many analysts point out that financial responsibility was handed down without a matching transfer of significant revenue, which is the core reason fiscal decentralisation remains incomplete.

Key committees and commissions that shaped the path 🔗

The constitutional amendments did not appear out of nowhere. Several committees built the intellectual case for empowered, financially secure local bodies over four decades.

Ashok Mehta Committee (1978) 🔗

Appointed by the Janata government in 1977, the Ashok Mehta Committee submitted its report in 1978 with 132 recommendations aimed at reviving a declining Panchayati Raj system. On the fiscal side, its most important suggestion was that Panchayati Raj institutions should have compulsory powers of taxation so they could mobilise their own resources rather than waiting for grants from above. It also proposed replacing the three-tier system with a two-tier model of zila parishads at the district level and mandal panchayats below them, and it argued for constitutional recognition of these bodies. The committee’s central message – that local bodies need their own dependable revenue base – remains directly relevant to fiscal decentralisation today.

L M Singhvi Committee (1986) 🔗

The L M Singhvi Committee, set up in 1986 to prepare a concept paper on revitalising Panchayati Raj for democracy and development, made the most consequential recommendation of all: that PRIs deserved formal constitutional recognition rather than existing at the mercy of ordinary state laws. The committee also argued that village panchayats should be given more financial resources and that regular, free elections should be guaranteed. Its push for entrenching local government in the Constitution fed directly into the thinking that produced the 73rd and 74th Amendments a few years later. While its primary focus was political and structural, the demand for adequate finances was woven through its recommendations.

Together, these committees trace a clear line: from recommending a structure (Balwant Rai Mehta), to demanding taxation powers and stability (Ashok Mehta), to insisting on constitutional protection (Singhvi). Each step strengthened the eventual case for treating local bodies as genuine units of self-government rather than administrative conveniences.

Role of central and state finance commissions 🔗

Recognising local bodies in the Constitution was only the beginning. Someone had to work out how money would actually flow to them. That job falls to two kinds of finance commissions, working at different levels.

The State Finance Commission 🔗

The State Finance Commission (SFC) is the workhorse of local-body finance. Under Articles 243-I and 243-Y, every governor is required to constitute an SFC at the expiration of every fifth year to review the financial position of both panchayats and municipalities. The SFC recommends how the net proceeds of taxes, duties, tolls, and fees collected by the state should be shared between the state and its local bodies, which taxes the local bodies themselves may levy or appropriate, and what grants-in-aid should flow to them from the state’s Consolidated Fund. It also suggests broader measures to improve local finances, and every recommendation must be placed before the state legislature along with the action taken on it.

In practice, the SFC is meant to correct two kinds of imbalance: the vertical imbalance between the state and its local bodies, and the horizontal imbalance between richer and poorer panchayats and municipalities. State documents describe the SFC as playing a crucial role in augmenting the financial resources of local bodies. The catch is that many states have been slow or irregular in constituting their SFCs, and governments are not bound to accept their recommendations, which dilutes their impact.

The Central Finance Commission 🔗

The Central Finance Commission, constituted under Article 280, primarily decides how resources are shared between the Centre and the states. After the 73rd and 74th Amendments, Article 280 was expanded so that the Central Finance Commission also recommends measures to supplement the resources of panchayats and municipalities, taking into account the recommendations of the State Finance Commissions. This created a formal pass-through: central funds can reach local bodies, with the Union acknowledging a responsibility parallel to the state’s duty to devolve resources.

Over successive cycles, these grants have grown substantially. The Fourteenth Finance Commission, for example, observed that cities were struggling with weak finances and limited capacity, and that many rural bodies were not equipped to perform their core functions. It recommended a large pool of grants for local bodies – running into lakhs of crores – to support basic services. Reports submitted to the Centre by the urban affairs ministry note that much of the money reaching ULBs through other channels is tied to specific schemes, which limits how freely local governments can use it. This is a recurring theme in fiscal decentralisation: the volume of transfers matters, but so does the discretion attached to them.

Why the gap between promise and practice persists 🔗

On paper, India has a sophisticated architecture for fiscal decentralisation: constitutional status for local bodies, two schedules of functions, mandatory finance commissions at two levels, and dedicated budget heads for transfers. Audit and research bodies have nonetheless flagged persistent weaknesses. The accounting and audit environment of local bodies differs widely across states, making it hard to track money. Local governments often lack the staff and systems to raise their own revenue, so they lean heavily on transfers. And because the actual extent of devolution is left to each state, two municipalities with the same constitutional standing can end up with very different real powers.

The result is a system where the legal framework is strong but uneven in practice. Fiscal decentralisation in India is best understood as a work in progress: a steady movement from centralised control towards genuine local autonomy, slowed by gaps in revenue, capacity, and political will.

What do you think? If a panchayat or municipality has constitutional functions but cannot raise its own revenue, can it really be called self-governing? And should State Finance Commission recommendations be made binding on state governments, the way court orders are, to close the gap between what is promised and what local bodies actually receive?

References

1. https://www.gktoday.in/balwantrai-mehta-committee/
2. https://en.wikipedia.org/wiki/Ashok_Mehta_Committee
3. https://byjus.com/free-ias-prep/panchayati-raj/
4. https://www.constitutionofindia.net/articles/article-243y-finance-commission/
5. https://finance.cg.gov.in/state_finance_commission/FSFC/State%20Finance%20Report/English/Chap-1.pdf
6. https://mohua.gov.in/upload/uploadfiles/files/Memorandum%20submitted%20by%20Ministry%20of%20Urban%20Development%20to%20the%2013th%20Central%20Finance%20Commission09.pdf
7. https://cag.gov.in/uploads/research_paper/RES-6-Regularity-Environment-relating-to-Audit-Account-05ebe260d1840f0-33316973.pdf