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Modern governance in India has its complexities, but with the principles of devolution, we bring forth the power of local voices, the importance of community-driven solutions, and the strength of decentralised decision-making. Furthermore, as per the Indian Constitution, by giving local governments the authority, resources, and responsibility to look after the unique needs of their communities, India paves the way for inclusive growth and sustainable progress. This blog on the Devolution of Powers and Finances up to Local Levels, also known as democratic decentralisation, will help you learn about the division of resources to the Panchayats, Gram Sabhas, as well as Municipalities.
Contents
- 1 What is the Meaning of Devolution of Powers and Finances?
- 2 What are the Constitutional Provisions relating to the Devolution of Powers and Finances in India?
- 3 The 74th Constitutional Amendment Act of 1992
- 4 What are the Challenges faced at the Local Levels relating to Finance and Power?
- 5 What is the Finance Commission’s Devolution of Power?
- 6 What are the Functions of the Finance Commission in the Devolution of Finance?
- 7 The Panchayats (Extension to Scheduled Areas) Act, 1996 (PESA Act)
- 8 FAQs
What is the Meaning of Devolution of Powers and Finances?
The devolution of powers and finances up to local levels involves handing over certain legislative, executive, and administrative authorities to the local levels.
The devolution of powers and finances up to local levels means handing over certain legislative, executive, and administrative responsibilities to local bodies. This change allows them to manage public services and carry out policies that match the specific needs of their communities.
In addition, the devolution of finances means giving these local bodies control over a part of the national or state budget. This financial freedom helps local governments use funds wisely, invest in local development projects, and focus on the priorities of their areas.
Also Read: Functions and Responsibilities of the State: Structure and Functions
What are the Constitutional Provisions relating to the Devolution of Powers and Finances in India?
The 73rd Constitutional Amendment Act, passed in 1992 and implemented on 24th April 1993, gave constitutional status to Village Panchayats as self-governing institutions. This was a landmark step to ensure grassroots democracy and strengthen local self-governance in rural India.
Before this amendment, Panchayats existed but lacked consistent funding, regular elections, and fair representation for women, Scheduled Castes (SCs), and Scheduled Tribes (STs). As a result, they couldn’t function effectively or independently.
The 73rd Amendment changed this by:
- Making elections to Panchayats mandatory every five years
- Ensuring reservation of seats for women, SCs, and STs
- Establishing a State Election Commission to conduct local polls
- Recommending the setup of State Finance Commissions to improve funding
- Listing 29 subjects under the 11th Schedule for Panchayats to manage, such as agriculture, rural housing, health, education, and more
Interestingly, Article 40 of the Directive Principles of State Policy already urged the state to promote Panchayats as self-governing units. The 73rd Amendment gave this principle real power and practical implementation.
Important Constitutional Provisions for Devolution of Powers and Finances
| Provision | Details | Purpose/Impact |
| 73rd Amendment Act, 1992 | Enacted on 24th April 1993, gave constitutional status to Panchayati Raj institutions | Strengthened rural self-governance through Village Panchayats |
| Article 40 (DPSP) | Part of the Directive Principles, it urges the state to organise Village Panchayats | Early constitutional push for local self-government |
| 11th Schedule (Added by 73rd Amendment) | Lists 29 subjects (like education, health, agriculture, etc.) to be handled by Panchayats | Clear distribution of powers to local rural bodies |
| 74th Amendment Act, 1992 | Enforced on 1st June 1993; provided constitutional status to Municipalities | Empowered urban local bodies to function as self-governing institutions |
| 12th Schedule (Added by 74th Amendment) | Lists 18 subjects (like urban planning, water supply, public health, etc.) for Municipalities | Defines the functional responsibilities of urban local bodies |
| State Finance Commissions (SFCs) | Set up every 5 years under both Amendments | Recommend the distribution of financial resources between state and local bodies |
The Panchayats: Part IX
The 73rd Amendment introduced Part IX to the Constitution, giving constitutional status to the Panchayati Raj system across India. It defines the structure, powers, and responsibilities of Panchayats to promote grassroots democracy.
Here are some key features of Panchayats under Part IX:
| Features of Panchayat Part IX of the Constitution | Details |
| Constitutional Recognition | Panchayati Raj institutions have been officially recognised as part of the Constitution. |
| Mandatory Establishment | As per Article 243-B, every state must set up Panchayats at the village, intermediate, and district levels. |
| Empowerment of Panchayats | According to Article 243-G, states must give Panchayats the power and responsibility to plan and implement local development. |
| Term of Office | Panchayat members are elected for a fixed term of 5 years. |
| Independent Elections | State Election Commissions are responsible for conducting independent Panchayat elections. |
| Reservation for Women & SC/STs | Under Article 243-D, there must be proper representation for women, Scheduled Castes (SCs), and Scheduled Tribes (STs) to ensure inclusive governance. |
Also Read: How many Articles are in the Indian Constitution?
The 74th Constitutional Amendment Act of 1992
The 74th Constitutional Amendment Act constitutionally recognised municipalities or Urban Local Bodies (ULBs) on the 1st of June, 1993. This amendment aimed to create an institutional setup for democratic decentralisation, thereby empowering local governments in India’s urban areas. Additionally, it granted ULBs the authority to perform the 18 functions outlined in the 12th Schedule of the Indian Constitution.
The Goals of the 74th Constitutional Amendment Act
Furthermore, municipalities are protected under the Indian Constitution’s enforceable provisions.
State governments are now obligated to adhere to the Act’s stipulations within the boundaries of their constitutions when implementing the municipal system. Moreover, legislation aims to strengthen and revive municipal governments so they can function effectively as units of local self-government.
| Feature | Details |
| Amendment Name | 74th Constitutional Amendment Act |
| Year Passed | 1992 |
| Came into Effect | June 1, 1993 |
| Recognised Body | Municipalities / Urban Local Bodies (ULBs) |
| Institutional framework for democratic decentralisation in urban areas | Reference in the Constitution |
| Authority Granted | Power to perform 18 functions |
| Reference in Constitution | 12th Schedule |
The Key Features of the 74th Constitutional Amendment Act
The 74th Constitutional Amendment Act, enacted in 1992 and enforced from 1st June 1993, laid the foundation for structured urban local governance across India. It introduced a three-tier classification of municipalities, enabling local bodies to better address the diverse needs of urban populations:
- Nagar Panchayats for areas in transition from rural to urban
- Municipal Councils for smaller urban settlements
- Municipal Corporations for large cities
This categorisation helps customise governance and service delivery according to the size, population, and complexity of each urban area.
The Act also provides a special provision for Industrial Townships. If a region is primarily industrial, the Governor can declare it an Industrial Township, where the industrial authority handles civic administration. In such cases, a separate municipal body is not required, ensuring focused and efficient governance in heavily industrialised zones.
Through this structure, the 74th Amendment strengthens democratic decentralisation and promotes better urban planning and management at the grassroots level.
| Key Features | Description |
| Three Types of Municipalities | 1. Nagar Panchayat: For transitional rural-to-urban areas. |
| 2. Municipal Council: For smaller urban areas. | |
| 3. Municipal Corporation: For larger urban areas and cities. | |
| Exception for Industrial Townships | The governor can declare a mostly industrial urban area as an Industrial Township, preventing the creation of a separate municipality. |
Also Read: What is the Difference between Fundamental Rights and Directive Principles?
What are the Challenges faced at the Local Levels relating to Finance and Power?
Local governments in India face several challenges that affect their ability to govern effectively, especially in terms of finance and autonomy. These challenges include:
Financial Constraints
Many local bodies have limited financial resources, which restricts their capacity to carry out development projects. They often depend heavily on grants from the State and Central governments, making it difficult for them to achieve financial independence.
Political Influence
Despite constitutional safeguards, local governments frequently experience political interference from higher government levels. Such interference hampers local decision-making and limits genuine governance freedom.
Capacity Limitations
Some local bodies lack sufficient administrative and technical skills. The absence of adequate training and support reduces their ability to plan and implement projects effectively.
Disparities in Devolution
The extent of power and resource devolution varies widely across states and regions, leading to unequal local governance structures. This inequality aggravates socio-economic disparities, posing challenges for balanced and inclusive development.
| Challenges | Details |
| Financial Constraints | Limited local funds; heavy dependence on State and Central grants limits financial independence. |
| Political Influence | Interference from higher government levels affects local autonomy and decision-making. |
| Capacity Limitations | Lack of administrative and technical skills; inadequate training restricts project planning and execution. |
| Disparities in Devolution | Unequal distribution of power and resources across states causes an imbalance in local governance and development. |
Also Read: Government of India Act 1935: Key Features, Significance and More
What is the Finance Commission’s Devolution of Power?
The Finance Commission is a constitutional body established under Article 280 of the Indian Constitution by the President of India. Its primary role is to allocate revenue resources between the Union Government and the State Governments. Established in 1951, the Commission aims to define and manage the financial relationship between the Centre and the States.
According to Article 281, the President presents the Finance Commission’s recommendations, along with an explanatory letter, to both Houses of Parliament. This procedure promotes transparency and accountability in managing financial matters.
The Finance Commission is appointed by the President every five years or whenever deemed necessary, highlighting its important role in India’s fiscal governance.
What are the Functions of the Finance Commission in the Devolution of Finance?
The Finance Commission plays a key role in dividing financial resources between the Central Government and the States to ensure balanced fiscal management across the country.
- The Central Government shares tax revenues with the States and provides grants from the Consolidated Fund of India following specific guidelines.
- The State Finance Commission advises on expanding the State’s Consolidated Fund to strengthen the financial resources of Municipalities and Panchayats.
- The President may refer any matter related to sound financial management to the Finance Commission. The Commission reviews the rules for grants-in-aid to States and the division of taxes between the Centre and States every five years.
- The Finance Commission’s recommendations, along with the government’s response, are presented to Parliament to maintain transparency.
- It evaluates the growth of a State’s Consolidated Fund to decide on resource allocation to Panchayats and Municipalities.
- To carry out its duties effectively, the Finance Commission has the authority to summon witnesses and request public records, as per the Code of Civil Procedure, 1908.
Also Read: What is Fiscal Federalism?
The Panchayats (Extension to Scheduled Areas) Act, 1996 (PESA Act)
The Government of India enacted the PESA Act to protect the rights of people living in Scheduled Areas, which were not fully covered under the 73rd Constitutional Amendment. This law extends the provisions of Part IX of the Constitution to Scheduled Areas across the country.
PESA specifically empowers the Gram Sabha at the local level, granting it significant authority, including consultation on land acquisition, control over minor forest produce, and the leasing of minor minerals.
PESA was implemented during the period when India opened its economy to Foreign Direct Investment. It coincided with the growth of the mining industry, which is mainly located in Scheduled Areas.
This timing allowed easier access to mineral resources for multinational corporations and the Indian corporate sector, enabling resource exploitation at lower costs.
The Powers of the Panchayats of Gram Sabha
An important feature of PESA is its emphasis on the Gram Sabha’s role in protecting community traditions, customs, cultural identity, local resources, and traditional methods of dispute resolution. The powers granted to Gram Sabhas include:
- Consultation for land acquisition and relocation
- Granting concessions for minor mineral extraction
- Managing small water bodies
- Regulating the sale of intoxicants
- Owning small-scale forest products
- Stopping illegal land alienation
- Controlling local markets
- Overseeing lending to specific tribes
Additionally, the Act also mandates that States empower Panchayats with the necessary authority for effective self-governance.
Devolving powers and finances to local levels is essential for effective governance and inclusive development. It empowers local bodies like Panchayats and Municipalities to address community needs directly, promotes transparency, and strengthens democracy from the grassroots. However, challenges like financial constraints and political interference must be addressed to ensure that local governments can fully realise their potential in improving citizens’ lives.
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FAQs
Ans. Devolution of powers to the local government or democratic decentralisation involves transferring authority over local affairs, services, and development decisions from the central government to local councils. Hence, guaranteeing tailored governance at grassroots levels.
Ans. Devolution of financial powers means granting local governments autonomy to manage and allocate funds. Moreover, empowering them to invest in local projects and address community needs effectively.
Ans. Devolution of power refers to the transfer of responsibilities, authorities, and usually financial resources from a central government to regional or local entities. Thus, enabling more localised decision-making and governance.
Ans. Devolution allows local bodies to make decisions and manage resources according to the specific needs of their communities. This leads to better service delivery, increased public participation, and stronger democracy at the grassroots level.
Ans. Local governments often face limited financial resources and rely heavily on grants from the State and Central governments. Political interference and lack of administrative capacity also affect their ability to use funds effectively.
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