Constitutional Impediments to Decentralization in the World's Largest Federal Country

Abstract

Decentralization is often advocated as a means of improving local democracy and enhancing what economists call allocative efficiency. In federal countries, where power is already divided between national and state governments, decentralization involves the devolution of power from state to local governments. The world’s largest federal country, India, took an unusual step to advance decentralization: it passed the 74th Constitutional Amendment Act to confer constitutional status on municipalities. However, India’s efforts to promote this devolution of power through a national urban renewal scheme have not been successful for three key reasons. First is the incomplete nature of India’s decentralization process. Political decentralization has been stymied by the language of the constitutional amendment itself; administrative decentralization has been hampered by the comparative advantage of entrenched state-level institutions; and fiscal decentralization has not occurred because financial responsibility — but not significant revenues — has been devolved. The second factor is the top-down way in which decentralization has been undertaken, which has exacerbated relations with the states and mitigated the goal of allocative efficiency. Third is the relative weakness of local governance structures, which has created a Catch-22 situation: as long as the local governments lack significant capacity, the states are reluctant to devolve power down to them. In order for decentralization to be successful, additional effort needs to be directed towards an effective model of cooperative federalism. With recently elected Prime Minister Narendra Modi poised to create “smart cities” and promote urban renewal, it is critical to understand why India’s prior decentralization efforts have largely failed. The lessons learned over the past decade could be an important guide to the future of cities in India as well as in other federal countries.