Day 6 – Q 2. Why is financial devolution a critical factor for the success of local governance? Substantiate your response with the help of suitable examples.  

  • IASbaba
  • June 16, 2020
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Governance, GS 2, TLP-UPSC Mains Answer Writing
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2. Why is financial devolution a critical factor for the success of local governance? Substantiate your response with the help of suitable examples.  

स्थानीय प्रशासन की सफलता के लिए वित्तीय विकास एक महत्वपूर्ण कारक क्यों है? उपयुक्त उदाहरणों की मदद से अपनी प्रतिक्रिया दें।

Demand of the question:

It expects students to write about criticality of financial devolution for the success of local governance along with examples to substantiate arguments. Students should also mentions limitations of financial devolution at local level. 


The 15th Finance Commission recommended giving greater financial freedom and powers to panchayats and urban local bodies for year 2020-21. Fiscal decentralization is nothing but the devolution of taxing and spending powers to lower levels of government. 


Devolution of more powers and finances to local bodies will strengthen third tier of governance in India. 73rd and 74th Constitutional amendments provided recognition to the local bodies in constitution and paved way for establishment of political administrative system at local level. 

Criticality of financial devolution:

Panchayats Urban local bodies.
To strengthen democracy at grass root level.  Financial devolution create situation for more innovative, independent and stronger city administration. 
Panchayats have very few revenue resources with them to provide services. Center and state can nudge local bodies for desired development agenda through financial devolution with conditions.  With the subsumption of taxes like octroi into GST, financial devolution has become much more critical. Basic service delivery will improve in Indian cities due to the lesser jurisdiction area and focused attention. E.g., Municipality of Mumbai has decided to tax garbage to fulfill its revenue demand.
It helps to avoid duplication of efforts by government machinery. There can be creation of knowledge innovation activity center to render advice and expertise to local authorities for planning and prioritizing development goals.  Unique developmental projects can be executed. To improve creditworthiness, autonomous authority to set realistic tax-rates and user charges for the services provided by them and also for pursuing hiring-firing policies. 
To use local resources in cost effective service delivery. Example of Patoda village of Maharashtra: It started its own local voluntary taxation of very minimal amount in return of free services like clean RO drinking water, hot water, sanitary pads, CCTV cameras in public spaces, flour mill, spice grinder machine and tractor for agricultural needs on minimal rent indicates realization of development model at village level with understanding of local needs. International cooperation with sister city development initiative. E.g. Central government has allowed state government to borrow directly from the bilateral Official Development Assistance (ODA) partners for implementation of vital infrastructure projects same can be allowed for city administration.
Financial devolution increases accountability to people so performance can be realized as direct contact with people.  Center and state could provide intellectual and skill pool if necessary.
Devolution based on capital asset creation, Human resource development, social indices and gender equality will bring desired results. Professional management of cities can be possible with reduction in wasteful expenditure.  

Though there are various issues associated with devolution of powers and finances at local level, reluctance of Politicians and bureaucrats to relinquish power to local bodies remain major hurdle. 

  • Issues like lack of expertise to plan development priorities and use resources optimally, lack of resources to implement development agenda with minimal avenues for taxation and income.
  • Fewer sources of finances at center and state level to devolve, lack of checks and balances on authorities at local level, myriad of social issues at rural level which can neglect minority social groups and position of women.
  • Non-uniformity of various programmes at local level can make regulatory oversight difficult, organized cartel of few individuals can indulge in corrupt activities; state government interference can continue to influence the decision making at local level.
  • Municipalities have not succeeded in realizing the potential of the property tax, though property values are on rise.


A vibrant India of the 21st Century, acting as an engine of inclusive growth, needs drastic reforms in the panchayat and municipal finance system of the country so as to broaden and deepen the resource base required to match the growing needs of infrastructure, socio-economic development, civic services including safe drinking water, clean air, sanitation, solid waste management for everyone.

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