State-Local Financial Relations in India

In a federal economy like India, it is important to understand the fiscal relations between different layers of government to bring out their implications for revenue generation, revenue sharing and taxation. This paper describes the functional responsibilities and sources of revenue of local bodies, explains the present constitutional arrangements relating to State-Local fiscal relations in India, and examines the role of various statutory bodies in this regard. It also discusses the recommendations of the various Finance Commissions which have successively emphasised the need to adequately empower Local bodies to enable them to provide basic services at the grass root level. The institution of State Finance Commission also needs to be strengthened so that it plays an effective role in the system of fiscal transfers to the third tier of government.