ENHANCING FISCAL DECENTRALIZATION IN GRASSROOTS GOVERNANCE: CRITICAL CHALLENGES AND EMERGING OPPORTUNITIES FOR INDIA’S THIRD TIER OF GOVERNMENT

Abstract

Fiscal decentralization, which means giving sub national governments the power to spend money, collect taxes, and make fiscal transfers, is particularly important for making democratic governance stronger, enhancing service delivery, and encouraging local development.  The 73rd and 74th Constitutional Amendments in India (1992) set up a legal system for third-tier governance (Panchayats and Urban Local Bodies); however the process of turning constitutional requirements into budgetary independence and administrative power has not been smooth.  This paper critically analyzes legal-institutional frameworks, the development of intergovernmental fiscal transfers (including recent Finance Commission reforms), the enduring limitations that obstruct substantial fiscal decentralization (such as narrow own-revenue bases, fragmented or tied grants, inadequate public financial management, capacity deficiencies, and accountability voids), and the current prospects offered by digitalization, accrual accounting initiatives, property tax modernization, blended finance, and participatory governance. Drawing on government reports (including the Fifteenth Finance Commission and NITI Aayog), World Bank and NIPFP studies, and empirical literature (notably Kerala’s people’s planning experience and state-level case studies), the paper offers an integrated set of policy recommendations and an implementation sequencing roadmap to strengthen fiscal autonomy, accountability and performance of India’s third tier.