Democracy Without Money: Why India's Local Governments Need Real Financial Power

Every election promises to bring government closer to the people. Yet, for millions of Indians, the government closest to them remains the one with the least power. A gram panchayat may know which road needs repair, which pond needs restoration, or which drain needs cleaning, but it often cannot spend a rupee without waiting for approvals from higher levels. More than three decades after the 73rd and 74th Constitutional Amendments, India has decentralised democracy, but not the State itself. Panchayats and municipalities possess ballots more readily than budgets.

The constitutional vision was ambitious. The 73rd and 74th Amendments created a third tier of government, assigning 29 subjects to Panchayati Raj Institutions and 18 to Urban Local Bodies while empowering them, through Articles 243H and related provisions, to raise revenues, receive grants, and benefit from State and Central Finance Commission transfers. But they contained a crucial flaw: while elected local governments became mandatory, meaningful fiscal devolution remained largely optional for states. The result is a constitutional paradox. India created institutions of self-government but left their empowerment to political discretion.

The consequences are visible in the numbers. In 2022-23, Panchayati Raj Institutions generated around ₹35,354 crore in revenue, yet their own tax collections were barely ₹737 crore, about one to two per cent of the total. Between 2017 and 2022, their own-source revenue averaged only ₹59 per capita, while nearly 80% of their income came from Central grants. Urban local bodies fare little better. Municipal own revenues remain around 1% of GDP, far below countries such as Brazil and South Africa, while property tax yields barely 0.15% of GDP. Smaller municipalities continue to face chronic resource gaps, leaving them unable to maintain even basic civic infrastructure.

A government that depends overwhelmingly on grants behaves differently from one that raises its own revenue. It becomes accountable upward to departments releasing funds rather than downward to citizens paying taxes. Local governments therefore function less as governments than as implementing agencies for centrally and state-designed schemes. The Union Cabinet's recent approval of a ₹7,395 crore programme to make gram panchayats financially self-reliant is welcome, but it also acknowledges how deeply entrenched this dependence has become.

Fiscal centralisation is not merely an administrative failure; it reflects a political choice. Control over money is also control over patronage, visibility, and electoral credit. Successive governments, irrespective of party, have championed decentralisation rhetorically while retaining fiscal authority in practice. Schemes are designed, branded, and monitored from above, leaving local governments responsible for implementation but not for deciding priorities. Fiscal dependence has become one of the principal ways through which political centralisation reproduces itself.

Structural weaknesses reinforce this pattern. Many states have transferred functions without corresponding funds or functionaries. Research by the National Institute of Public Finance and Policy shows several states underutilise even the taxation powers already available to local bodies. Property tax systems suffer from outdated valuations, incomplete records, weak enforcement, and inadequate staffing. The introduction of GST simplified indirect taxation but also removed important municipal revenue sources such as octroi and entry tax without creating an equivalent municipal share in the new tax architecture. At the same time, heavily tied Finance Commission grants restrict local discretion, while constitutionally mandated State Finance Commissions are frequently delayed or their recommendations ignored.

The costs extend well beyond public finance. Weak local governments struggle to maintain roads, water supply, sanitation, waste management, and public spaces. Citizens blame panchayats and municipalities for failures even when financial authority rests elsewhere. Accountability becomes blurred because responsibility and power are separated. Elections punish the visible institution rather than the one that actually controls resources.

The implications are becoming even more serious as India urbanises and confronts climate change. Financially weak municipalities are not merely a governance problem but an economic risk. Cities cannot sustain growth if they cannot finance drainage, transport, and waste management. Likewise, heat waves, groundwater depletion, urban flooding, and climate adaptation demand rapid local responses. India's resilience to future crises will depend as much on fiscal decentralisation as on engineering solutions.

Experience also shows that another path is possible. Kerala's deeper devolution has produced not only stronger local finances but also more participatory planning and greater accountability. High-performing panchayats in Karnataka, Maharashtra, and Gujarat have demonstrated that robust property taxation, digital administration, efficient management of common resources, and predictable revenue sharing can generate substantial local revenues. The problem, therefore, is not constitutional design alone but uneven political commitment.

The next generation of reforms must rest on three principles. First, money must follow functions, with genuine devolution of the three Fs and timely implementation of State Finance Commission recommendations. Second, revenue must reward accountability, through modern property tax systems, better utilisation of local assets, greater untied grants, and a credible fiscal framework for municipalities in the GST era. Third, autonomy must be matched by transparency, supported by digital accounting, professional staffing, and public disclosure of fiscal performance.

India's democratic journey did not end with electing local governments; it begins with trusting them. Democracy is measured not only by how often people vote but by whether the governments they elect possess the power to act. Until money follows power, India's third tier will remain constitutional in form, but incomplete in substance.