In one of the most insightful books I have read on reform-era China, How China Escaped the Poverty Trap, the political scientist, Yuen Yuen Ang, vividly describes the centrality of local governments to China’s economic rise. Beijing, she argues, played the role of “director not dictator”, signalling priorities while creating conditions that allowed provincial and, more significantly, local governments to innovate, experiment and compete, even encouraging them to behave like venture capitalists or developers, not just bureaucracies. This is how cities like Shenzhen emerged as the hub of the manufacturing boom. China’s economic strategy was not about centralised control. Rather it relied on what Ang calls “directed improvisation” where decentralised experimentation at the local level laid the foundation for achieving collective national goals.
The contrast with India couldn’t be starker. Historically, India’s federal bargain has been remarkably comfortable with high levels of administrative and fiscal centralisation as successive national governments preferred to cast themselves in the role of ‘dictators’ rather than ‘directors’. The tensions this created in Centre-state relations have long been part of the national debate. States routinely complained against the Central governments’ penchant to squeeze states of fiscal resources while simultaneously encroaching on constitutionally-assigned responsibilities. It is hard to imagine, given his ‘double engine’, ‘one nationism’ politics of the last decade, but Narendra Modi, as chief minister, had led the charge demanding that 50% of the divisible pool of taxes be devolved to states. Once in power at the Centre, his government has effectively used the constitutional provision of imposing cess and surcharge (which are not shareable with states) to ring fence resources for the Centre and undermine the states’ fiscal autonomy. That said, India’s federalism has produced some pockets of economic dynamism despite centralisation. As Devesh Kapur and Arvind Subramanian note in their recent book, One-Sixth of Humanity: Independent India’s Development Odyssey, one-third of India, chiefly southern and western states, grew faster than China in the last four decades.
However, where India’s federal system has completely broken down is at the local-government level: panchayats and urban local governments. This fact is completely ignored in our fraught and politically-charged national debates on federalism. Not least because states are the biggest culprit.
India gave formal recognition to local governments only as late as the 1990s with the passage of the 73rd and the 74th constitutional amendments. Although the move to decentralise coincided with economic liberalisation, local governments were never central to the economic growth story. In fact, they were summarily ignored. Local governments account for less than 3% of the total government expenditure. Compare this with China’s local governments that are responsible for over 50% of public expenditure. Most states, with a few notable exceptions, have refused to regularly set up State Finance Commissions to determine financial and taxation powers to local governments. Key departments — urban planning, water and sanitation — remain under the control of states with no accountability to local governments, even though they are constitutionally responsible for most civic services.
‘Bringing government closer to people’ in a manner that ensures citizens’ voices shape decision making and make governments accountable for responding to local needs and priorities is the binding logic for decentralisation. But if local governments are not empowered to perform their functions, accountability breaks down. After all, voters are aware of their limited capacity. Thus, local elections are not about accountability for public services but about power grabs that reproduce entrenched problems of money and muscle power in our politics. The irony is inescapable. Authoritarian China has governments far closer and, therefore, far more accountable to its people than democratic (notwithstanding currently backsliding) India.
Ironically, it is the Finance Commission, a Central body, that has stepped in to plug the breach via a steady stream of grants to local governments. With the passage of the 73rd and the 74th amendments, Finance Commissions were constitutionally obligated to augment state resources on the basis of recommendations made by the State Finance Commissions. To their credit, successive Finance Commissions have taken this role seriously despite states’ failure to set up and operationalise their Commissions. So much so that the 15th Finance Commission made part of its grant to local governments conditional on setting up Finance Commissions. The irony of New Delhi, dictating principles of ‘decentralisation’ to states is inescapable! In fact, this has created its own moral hazard, the pressures for empowering local governments from civil society organisations and, indeed, elected local governments themselves have now shifted away from states to the Centre via the Finance Commission. Conditionalities notwithstanding, states are now off the hook!
Most recently, the 16th Finance Commission, tabled in Parliament in February, has taken a significant leap toward reshaping local-government financing. First, it has substantively enhanced funds to local government, from Rs 4.36 lakh crore recommended by the 15th Finance Commission to Rs 7.91 lakh crore for the period, 2026-31. Second, it has taken a small step towards giving local governments greater autonomy by freeing up 60% of the grants to be spent entirely at the discretion of local governments (past Commissions had tied significant amounts of the grant to priorities determined by the Central government) and, last but most significantly, the Commission has given greater priority to cities, allocating 45% of the total pool of money to urban local governments, compared to the previous Commission’s 36:64 urban:rural ratio. In addition, the 16th Finance Commission continues the previous trend of using conditionalities like the status of State Finance Commissions in the hope of disciplining states.
Will this change the rules of the game? I remain sceptical. At its core, decentralisation is about political power-sharing. It is about arriving at a consensus on a fundamental governance question — what level of government should perform what level of function. This is not a purely technocratic question resolved through financial devolution. It is a deeply political act. China, an authoritarian, one-party State, produced consensus from the top-down by empowering provincial leaders to compete within the boundaries of the centralised party structure. In India, the consensus will have to emerge from the bottom-up with elected local governments and citizens coming together to demand that states redraw the federal compact. States have done this routinely vis-à-vis the Centre. No chief minister, even in today’s era of political centralisation, would stay quiet if the Government of India failed to set up the Finance Commission. This is the battle local governments must fight.
In the current political moment, as obituaries of Indian democracy are being written, democratic local governments have an even greater urgency. For only when citizens can have governments that are responsive to their needs will the promise and the potential of democracy be restored.
Yamini Aiyar is senior visiting fellow, Brown University
