Decentralization can be viewed from diverse perspectives of which political and economic perspectives are relevant to this context. The former perspective encompasses political and constitutional dimensions of public sector structure. This means that the objective function of federalism incorporates the goal of enhanced political participation 1 (see Inman 1997, 73â105). The basic assumption in such an approach is that decentralized political systems impact favourably on political outcomes and political participation.
Fiscal federalism in an economic perspective , on the other hand, focuses on economic efficiency in the performance of the public sector of a country. Decentralization is essentially anchored on the premise that government closer to the people would be more responsive to the particular preferences of their constituencies and will be able to provide âthe efficient level of output of âlocalâ public good (i.e. that for which the sum of residentsâ marginal benefits equals marginal cost)â (Oates 1999, 1120â1149).2
The decentralization theorem, which is a normative proposition, states that âin the absence of cost savings from the centralized provision of local [public good] and of inter-jurisdictional externalities, the level of welfare will always be at least as high (and typically higher) if Pareto-efficient levels of consumption are provided in each jurisdiction than if any single, uniform level of consumption is maintained across all jurisdictionsâ (Oates 1972).3 The theorem thus provides the rationale of economic efficiency for favouring decentralized provisioning of public goods with localized effects. The magnitude of the welfare gains from fiscal decentralization depends both on the extent of heterogeneity of preferences and on cost differences across jurisdictions. In other words, as Oates puts it, âdecentralized levels of government have their raison dâĂȘtre in the provision of goods and services whose consumption is limited to their own jurisdictionâ (Oates 1999).4
One important question that follows from the above two perspectives of decentralization is whether the goal of political participation is in conflict with the goal of economic efficiency . To put it another way, is increased political participation possible only at the cost of economic efficiency? Or is there a trade-off? To quantify the trade-offs, can one measure in a meaningful way the rate of substitution between economic efficiency and political participation and determine the degree of the optimal level of decentralization? While answers to these questions are not easy, the political objectives appear to strengthen the case for fiscal decentralization .
In regard to the economic goal of decentralization in the context of developing countries , the important question that arises is: Is decentralization conducive to growth? A formal theory of fiscal decentralization and economic growth does not seem to exist. International cross-sectional study suggests that there is a sharp contrast between the degree of decentralization in the developed and developing countries. It is observed that the developing countries are characterized by relatively higher degree of fiscal centralization (Oates 1985, 748â757).5 However, some studies find evidence to the effect that fiscal decentralization leads to more rapid growth (Jeff Huther and Anwar Shah 1996).6 It is argued that as economies grow and mature, fiscal decentralization yields economic gains (Bahl and Linn 1992).7
One critical aspect of decentralization is the disparity of the state and local level governments in their expenditure commitments and the access to revenues. Inadequacy of revenue sources at decentralized levels of government leads to heavy reliance on transfers from above that erodes incentives for responsible fiscal decision-making. There is, therefore, a strong case for providing adequate and effective tax sources for the local level governments in developing countries . Indeed, an intergovernmental fiscal relation is one of the most critical issues of fiscal federalism in the developing world (Bahl and Linn 1992).8
It is in this broad perspective that we can view the evolution of rural local government or panchayats in India. There is evidence to suggest that panchayats as a form of self-governing institution was in existence even in ancient India . But these were different in character from what was conceived and put into practice in the West. It is interesting to note that âin ancient India the king was head of the State, but not of society. He had a place in the social hierarchy, but it was not the highest place. As a symbol of the State, he appeared to the people like a remote abstraction with no direct touch with their daily life, which was governed by the social organizationâ (Mookherji 1958).9
Mahatma Gandhi during the freedom movement formulated the idea of village swaraj as âa complete republic, independent of its neighbours for its own vital wants and yet interdependent for many others in which dependence is a necessityâ10 (Gandhi 1962). Even so, local government or panchayats did not figure in the first draft of the Indian Constitution . It is only later at the insistence of Mahatma Gandhi that panchayats were included under the Directive Principles of State Policy which is the non-justiceable part of the Indian Constitution. It stipulates that âthe State shall take steps to organize village Panchayats and endow them with such powers and authority as may be necessary to enable them to function as units of self governance.â The term âlocal governmentâ is listed as item five of the State List in the Constitution.
Nevertheless, panchayats had no role to play in the overall development plan of the country in the early 1950s. Community development projects that were launched with the objective to involve people in the development process failed to evoke their participation. Having noted this failure, in a search for a better institutional mechanism for public participation and efficient development delivery, the Balwantray Mehta Committee was set up in 1957.11 Examining this issue, the Committee recommended that âpublic participation in community work should be organized through statutory representative bodiesâ (GOI 1957, 23).12
It is against this background that the first Panchayati Raj Institution (PRI), which was structured at the district and block levels, was inaugurated by the prime minister on October 2, 1959 at Nagaur in Rajasthan. By the mid-1960s PRIs were established in all parts of the country. However, they were not functioning as was expected and were, in fact, marginalized as self-governing units. The Ashok Mehta Committee 13 was appointed in 1977 to identify the factors responsible for its weaknesses. Bureaucratic resistance, lack of political will and elite capture were found to undermine the progress of the PRI. Interestingly, in his dissent note to the Ashok Mehta Committee, E. M. S. Namboodiripad wrote: âdemocracy at the Central and State levels, but bureaucracy at all lower levelsâthis is the essence of Indian polity as spelt out in the Constitution.â14 The L. M. Singhvi Committee 15 was constituted in 1986 to search for ways to regenerate PRIs in the country. The Committee recommended providing constitutional status to PRIs.
In his quest for a responsive administration, Rajiv Gandhi held five workshops on this theme with the district magistrates and collectors at Bhopal, Hyderabad, Imphal, Jaipur and Coimbatore between December 1987 and June 1988. It is through such a wide consultative process that he crystallized his ideas about panchayats and their role not only in the delivery of some tangible and quantifiable services but also in exerting immense impact on the lives of t...