Post-Economic Reform Initiatives in Decentralised Governance in India

The early 1990s were a turning point for India. As the country opened up its economy, policymakers realised that centralised planning alone could not address the varied needs of a vast, diverse nation. Liberalisation made it clear that if markets were being decentralised, governance had to follow. This recognition paved the way for one of the most significant shifts in grassroots democracy, where power and resources were meant to move from state capitals to villages and towns.

Why economic reforms demanded a rethink of governance 🔗

The 1991 economic crisis forced India to reconsider how it managed its affairs. With foreign exchange reserves depleted to barely a billion dollars, the country embraced liberalisation, privatisation, and globalisation as its new economic mantra. The Eighth Five-Year Plan, finally launched in 1992 after the initiation of structural adjustment policies, marked a clear break from the earlier command-and-control approach.

But economic reforms alone were not enough. The central planning model had produced modest results in rural development, and a growing body of evidence suggested that despite the proliferation of poverty alleviation programmes, social and economic development outcomes remained underwhelming because virtually no planning initiatives were taken up at the grassroots level. The diagnosis was clear: development plans drafted in distant secretariats often failed because they ignored local realities.

This became the philosophical launching pad for democratic decentralisation. If markets were to respond to local signals, so should governance.

The 73rd and 74th Amendments as structural reform 🔗

The twin Constitutional Amendments of 1992 must be seen not just as legal instruments but as structural reforms complementary to the economic reforms of the same period. The 73rd and 74th Constitutional Amendment Acts came into force on 24th April 1993 and 1st June 1993, respectively, bringing State Governments under the constitutional obligation to adopt the new system of Panchayati Raj.

Part IX was added to the Constitution for rural local bodies, and Part IX-A for urban bodies. The 11th Schedule listed 29 subjects for Panchayats, ranging from agriculture to poverty alleviation, while the 12th Schedule listed 18 subjects for municipalities. Until that point, local governments in India were created by virtue of the “ultra vires” principle, and their governance was left entirely to state discretion. The amendments ended that dependence by giving local bodies constitutional recognition.

Five pillars of the post-reform decentralisation agenda 🔗

The post-reform decentralisation initiative rested on five interconnected goals. Regular planning bodies: The amendments mandated the creation of permanent institutions capable of drafting local development plans, replacing the ad hoc arrangements of the past. Decentralisation of power: Decision-making authority was to flow downward rather than remain concentrated in state capitals. Devolution of financial resources: Local bodies were to be financially enabled to execute their responsibilities. Political subordination, not bureaucratic: Elected representatives at the local level were to answer to higher political authorities, not to unaccountable officials. People’s participation: Through the Gram Sabha and ward committees, citizens were to become active participants rather than passive beneficiaries.

Creating permanent institutions for decentralised planning 🔗

One of the most important contributions of the amendments was the creation of a permanent constitutional architecture for local planning. Articles 243G and 243W empower panchayats and municipalities to prepare plans for economic development and social justice at their respective levels, while Article 243 ZD provides for the constitution of a District Planning Committee to consolidate these plans into a development plan for the district as a whole.

This was a significant departure from earlier approaches. Throughout the 1950s, 1960s, and 1970s, several attempts had been made to introduce decentralised planning, but most failed because there were no permanent people’s institutions at the district or sub-district levels to sustain them. With the amendments, such institutions now existed as a matter of constitutional right.

Kerala’s People’s Plan Campaign 🔗

Kerala quickly emerged as a laboratory for the new approach. Kerala initiated its revolutionary process of democratic decentralisation and decentralised planning at the beginning of the Ninth Five Year Plan in 1996, launched in a campaign mode named the People’s Plan Campaign, because the concept of participatory planning was new to the people, representatives, and officials in local self-governments. The state transferred functions, functionaries, and a significant share of plan funds to local bodies, making it a model other states were urged to emulate.

Devolving finances: the State Finance Commission 🔗

No meaningful decentralisation is possible without money, and the amendments recognised this. Article 243-I mandates the Governor of every state to constitute a State Finance Commission every five years to review the financial position of panchayats and recommend how taxes, duties, and fees should be shared between the state and local bodies.

Alongside, the Central Finance Commission was given a new role. Under Article 280(3)(bb), it now recommends measures to augment the consolidated fund of a state to supplement resources for panchayats. Out of total grants earmarked for Panchayati Raj institutions, 60% are tied and allocated for national priorities such as drinking water supply, rainwater harvesting, and sanitation, while 40% are untied, allowing Panchayati Raj institutions to use them at their discretion.

Enhancing people’s participation 🔗

Perhaps the most transformative feature of the post-reform architecture was its insistence on inclusive representation. Seats were reserved for Scheduled Castes, Scheduled Tribes, and crucially, one-third of all seats (now one-half in many states) for women. The Gram Sabha – the assembly of all registered voters in a village – was given a formal constitutional role in approving plans, budgets, and beneficiary lists.

This was later extended to tribal areas through the Panchayat Extension to Scheduled Areas (PESA) Act of 1996, which extends the 73rd Amendment with modifications to tribal areas in ten states, enabling self-governance through Gram Sabhas. In PESA areas, the Gram Sabha gained significant powers over minor forest produce, minor water bodies, and land transfers – a radical recognition of tribal autonomy.

The gap between promise and practice 🔗

Three decades on, the record of these initiatives is mixed. The scaffolding exists, but the building remains incomplete in many states.

Financial autonomy remains elusive 🔗

The numbers are sobering. According to the Reserve Bank of India’s report on Panchayati Raj finances for 2022-23, panchayats earn only 1% of their revenue through taxes, while roughly 80% of their revenue comes from Central government grants and 15% from State government grants. This overwhelming dependence on external funding compromises the very autonomy the amendments sought to establish.

The situation is worsened by delays and dysfunction in the State Finance Commission process. According to a Standing Committee report, out of 26 states for which information was provided, only nine had constituted 6th State Finance Commissions, and of them only two were active, with some states having not even constituted their 4th and 5th Finance Commissions. The constitutional mandate of timely review has become a paper formality in several states.

Functions without functionaries 🔗

The problem of incomplete devolution is structural. A Parliamentary Standing Committee observed in 2025 that despite the constitutional mandate, devolution of functions, funds, and functionaries to Panchayati Raj Institutions remains incomplete, with many Panchayats operating with limited administrative authority, inadequate financial resources, and without effective planning control.

Many states have transferred subjects on paper but retained the staff and budgets with line departments. The result is a panchayat that has a legal right to plan for agriculture but no agriculture officer reporting to it.

Urban bodies struggle too 🔗

Municipalities have faced parallel difficulties. An RBI survey of 221 municipal corporations for 2020-21 revealed that more than 70% experienced a decline in revenues even as their expenditure rose by almost 71.2%, while OECD data show India has the lowest property tax collection rate in the world. Urban local bodies are expected to deliver world-class city services while operating with revenue systems designed for a different era.

The persistent challenge of bureaucratic control 🔗

The amendments envisioned elected representatives as the primary authority at the local level, with bureaucracy in a supporting role. In practice, the reverse often holds. District Magistrates, Block Development Officers, and line department officials continue to wield disproportionate influence over local decisions. This subordination of elected bodies to the bureaucracy was one of the original grievances the amendments sought to address, and it remains the most stubborn structural barrier.

Part of the challenge lies in capacity. Many elected representatives, particularly first-time members from marginalised groups, need sustained training to match the technical competence of bureaucrats. Without it, the temptation for officials to dominate decision-making remains strong.

What has actually changed 🔗

Despite these shortcomings, it would be wrong to dismiss the post-reform decentralisation initiatives as failures. Regular elections to over 2.5 lakh panchayats and urban local bodies are now an unremarkable feature of Indian democracy. Women’s participation in local governance is among the highest in the world. States like Kerala, Karnataka, and West Bengal have shown that genuine devolution can produce real improvements in service delivery, planning, and accountability.

The post-reform framework also created a political constituency for decentralisation. Millions of elected local representatives, their families, and their voters now have a direct stake in strengthening the system. This constituency did not exist before 1993.

The unfinished agenda 🔗

Completing the decentralisation project will require states to transfer not just functions but functionaries and finances in a synchronised manner. State Finance Commissions need to be constituted on time and their recommendations taken seriously. The Standing Committee has recommended that the Panchayati Raj Ministry publish an annual State of Devolution Report and that the central government link financial incentives under grants and schemes to actual progress on devolution. Capacity building, technology adoption, and stronger audit systems are equally essential.

The deeper issue, though, is political will. Decentralisation redistributes power, and those who hold it rarely let go willingly. The post-reform framework gave India the legal architecture for grassroots democracy; whether that architecture becomes a living institution depends on choices made in state capitals every year.

What do you think? Has the promise of democratic decentralisation been better served by the constitutional amendments, or do you feel the real barriers are political rather than legal? And in your view, should financial devolution to local bodies be made legally binding on states, or should it remain a matter of state discretion as it largely is today?

References

1. https://en.wikipedia.org/wiki/Five-Year_Plans_of_India
2. https://www.epw.in/journal/2001/12/commentary/decentralised-planning-and-panchayati-raj.html
3. https://www.drishtijudiciary.com/to-the-point/ttp-constitution-of-india/73rd-and-74th-constitutional-amendment-acts
4. https://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=1477&context=djcil
5. https://spb.kerala.gov.in/economic-review/ER2012/Chapter8/chapter08.html
6. https://www.jnanaprabodhini.org/2025/08/18/from-taxes-to-grants/
7. https://theiashub.com/free-resources/free-pdfs/devolution-of-powers-and-finances-up-to-local-levels-and-challenges-therein
8. https://www.drishtiias.com/daily-updates/daily-news-analysis/finances-of-panchayati-raj-institutions
9. https://india.mongabay.com/2023/03/state-finance-commissions-in-poor-shape/
10. https://prsindia.org/policy/report-summaries/devolution-of-funds-under-panchayati-raj-system