Experts Explain | How empowering India’s local governments can kickstart innovation and growth
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Context
Despite the constitutional mandate provided by the , India's local governments, particularly urban local bodies (ULBs), remain chronically underfunded and dependent on state governments. The article highlights how this 'stepchild' status stifles urban innovation and growth, contrasting India's failure to monetize urban land values with China's success, and argues that debates on federalism must move beyond Centre-state relations to include the empowerment of the third tier.
UPSC Perspectives
Polity
The article brings to light the incomplete nature of democratic decentralization in India. The of 1992 aimed to create a robust third tier of government by providing constitutional status to municipalities. However, true decentralization requires the devolution of the '3 Fs': Functions, Functionaries, and Funds. Currently, state governments act as an 'offending step-parent,' severely limiting the autonomy of ULBs. For instance, ULBs lack the power to appoint senior officials like municipal commissioners, making staff accountable to the state rather than local citizens. This administrative stranglehold results in a 'low-equilibrium political economy trap' where local bodies are unable to exercise agency. The overbearing role of the second tier directly contradicts the principle of subsidiarity, which dictates that public functions should be exercised by the lowest level of government possible. The upcoming delimitation exercise, which will likely increase the electoral weight of urban areas, may force state governments to address this power imbalance.
Economic
A critical issue raised is the abysmal state of municipal finance. The article notes that the urban third tier's share in tax generation has stagnated at roughly 0.3% of GDP, leading to massive dependency on devolved funds and Central schemes like . A key economic concept here is fiscalization of land values—the ability of the state to capture revenue from rising property values during periods of rapid economic growth and urbanization. While China successfully monetized its land assets (land revenues reached over 10% of GDP), India's revenues remained flat at about 1% of GDP. This failure is attributed to historical, socialist-inspired policies like the of 1976, which created market distortions and fueled the black economy rather than generating public revenue. Furthermore, ULBs are often unwilling or unable to levy direct taxes (like property tax) on their citizens due to lack of administrative capacity and political will. This chronic resource constraint prevents cities from investing in vital infrastructure, ultimately dragging down national economic growth.
Governance
The piece advocates for a shift from a purely vertical view of federalism to one that includes competitive sub-federalism. Currently, urban development is often driven by top-down Central schemes such as the (JNNURM) and its successor . While these schemes provide much-needed funding tied to structural reforms, they often lack sufficient citizen participation and fail to address the core issue of weak local capacity. The author suggests that fostering competition between cities, rather than just between states, is crucial for dynamism. In China, fierce competition among cities drives industrial policy and growth. In India, as mega-cities like Delhi suffer from severe pollution and congestion, the rise of competitive Tier-2 and Tier-3 cities could act as a catalyst for better governance. The failure to empower city governments has direct consequences on livability, as evidenced by the severe environmental degradation in major urban centers. Effective governance requires local authorities to have both the financial independence and administrative authority to respond directly to citizen needs.