Approach: Introduce with role of local governments in grass-root governance and their inability to raise
taxes and function effectively. Discuss impact of inability to raise funds in LGs functioning in form of salary
delays, policy implementation, policy reluctance etc. Mention ways to resolve inability to raise taxes in form
of state action, raising local fees etc. Conclude with need to foster genuine local fiscal federalism accompanied
by fiscal responsibility.
Local bodies are institutions of self-governance at local level (village and urban areas) set up by 73rd and
74th Amendments to strengthen grass root participatory democracy. Local bodies are empowered to
raise their own revenue through local taxes.
However, so far local governments have been unable to raise finances of their own. According to Economic
Survey 2017-18, Panchayats generate only 5% of their revenue and depends on Centre and State
This inability to raise local revenue has impacted functioning of local governments in following ways:

  1. Project reluctance: With less funds, local governments are reluctant to take on projects that
    require any meaningful financial outlay and are often unable to solve local governance needs.
  2. Policy implementation: Local governments are responsible for healthcare, water supply,
    sanitation etc., for which they lack funds. Due to lack of own funds and lesser autonomy in
    spending they are unable to implement welfare policies effectively.
  3. Local involvement: Without fiscal autonomy and decentralization, they are unable to operate like
    elected governments. As a result, local communities are unable to engage with the process of
    planning and accountability.
  4. Salary delays: Insufficient funds translates into salary delays for employees and affect the services
    and demotivates workers to work efficiently.
    Following steps are needed to help local governments to raise finance of their own:
  5. State action: State governments must act in accordance with Article 243H in devolving greater
    taxation powers to the local bodies.
  6. Increase property tax collection: Use of technology for effective property tax collection, by using
    GIS mapping, cross-checking with building licenses, ration cards, etc.
  7. Local fee/charges: Local charges have immense potential in increasing revenue, such as recovery
    on user charges (water, etc.), right of way from gas/electricity, cell tower charges, leasing
    electricity poles etc.
  8. Participatory funding: The potential of participatory funding (private sector, CSR, and local
    community) needs to be tapped as has been done by Bengaluru, Ahmedabad, Mathura (Hybrid
    Annuity project), Indore and Pune.
  9. Constitutional amendment: Suitable revisions are needed for mandatory devolution of power
    from state to local bodies for empowering local bodies.
    The COVID-19 pandemic has brought to light the importance of local governments in grass-root
    governance. The only long-term solution to make them function effectively is to foster genuine fiscal
    federalism where they are enabled to raise a large portion of their own revenue and face hard budget
    constraints, i.e., fiscal autonomy accompanied by fiscal responsibility.