Panchayati Raj Institutions: Issues and Challenges

Federalism and India’s human capital


From UPSC perspective, the following things are important :

Prelims level : 73rd and 74th Amendments

Mains level : Paper 3- Decentralisation and its relationship with human capital

The article argues for recognising the correlation between human capital and decentralisation in India.

Low human capital indicators

  • In the World Bank’s Human Capital Index, the country ranked 116th.
  • The National Family Health Survey-5 for 2019-20 shows that malnutrition indicators stagnated or declined in most States.
  • The National Achievement Survey 2017 and the Annual Status of Education Report 2018 show poor learning outcomes.
  • In addition, there is little convergence across States.
  • India spends just 4% of its GDP as public expenditure on human capital:1% and 3% on health and education respectively— one of the lowest among its peers.

Initiatives to address these issues

  • Investing in human capital through interventions in nutrition, health, and education is critical for sustainable growth.
  • The National Health Policy of 2017 highlighted the need for interventions to address malnutrition.
  • On the basis of NITI Aayog’s National Nutrition Strategy, the Poshan Abhiyaan was launched, as part of the Umbrella Integrated Child Development Scheme.
  • The latest Union Budget has announced a ‘Mission Poshan 2.0’ and the Samagra Shiksha Abhiyan has been the Centre’s flagship education scheme since 2018.

Relation between decentralisation and human capital

  • International experience suggests that one reason why these interventions are not leading to better outcomes may be India’s record with decentralisation.
  • Globally, there has been a gradual shift in the distribution of expenditures and revenue towards sub-national governments.
  • These trends are backed by studies demonstrating a positive correlation between decentralisation and human capital.

Issues with decentralisation in India

1) Letting states decide the way of empowerment

  • The 73rd and 74th Amendments bolstered decentralisation by constitutionally recognising panchayats and municipalities as the third tier.
  • The Amendment also added the Eleventh and Twelfth schedules containing the functions of panchayats and municipalities.
  • These include education, health and sanitation, and social welfare for panchayats, and public health and socio-economic development planning for municipalities.
  • However, the Constitution lets States determine how they are empowered.
  • In effect, three tiers of government are envisaged in the Constitution it divides powers between the first two tiers — the Centre and the States
  • This has resulted in vast disparities in the roles played by third-tier governments.

2) Centralised nature of fiscal architecture

  • While the Constitution assigns the bulk of expenditure responsibilities to States, the Centre has major revenue sources.
  • To address this vertical imbalance, the Constitution provides for fiscal transfers through tax devolution and grants-in-aid.
  • In addition, the Centre can make ‘grants for any public purpose’ under Article 282 of the Constitution.
  • While fiscal transfers that are part of tax devolution are unconditional, transfers under grants-in-aid or Centrally Sponsored Schemes (CSSs) can be conditional.
  • Therefore, the increase in the States’ share of tax devolution represents more meaningful decentralisation.
  • Despite some shifts towards greater State autonomy in many spheres, the centralised nature of India’s fiscal architecture has persisted. 
  • Centrally Sponsored Schemes (CSS) have formed a sizeable chunk of intergovernmental fiscal transfers over the years, comprising almost 23% of transfers to States in 2021-22.
  • But its outsized role strays from the intentions of the Constitution.
  • There are issues in the design of CSSs as well, with the conditions being overly prescriptive and, typically, input-based.
  • Against this, international experience reveals that schemes with output-based conditions are more effective.
  • Moreover, CSSs typically have a cost-sharing model, thereby pre-empting the States’ fiscal space.

3) Lack of fiscal empowerment

  • Third-tier governments are not fiscally empowered.
  • The collection of property tax, a major source of revenue for third-tier governments, is under 0.2% of GDP in India, compared to 3% of GDP in some other nations.
  • The Constitution envisages State Finance Commissions (SFCs) to make recommendations for matters such as tax devolution and grants-in-aid to the third tier.
  • However, many States have not constituted or completed these commissions on time.


  • The Centre should play an enabling role, for instance, encouraging knowledge-sharing between States.
  • For States to play a bigger role in human capital interventions, they need adequate fiscal resources.
  • To this end, States should rationalise their priorities to focus on human capital development.
  • The Centre should refrain from offsetting tax devolution by altering cost-sharing ratios of CSSs and increasing cesses.
  • Concomitantly, the heavy reliance on CSSs should be reduced, and tax devolution and grants-in-aid should be the primary sources of vertical fiscal transfers.
  • Panchayats and municipalities need to be vested with the functions listed in the Eleventh and Twelfth Schedules.

Consider the question “There is a positive correlation between decentralisation and human capital. This in part explains India’s low human capital indicators. In light of this, examine the issues with the decentralisation in India and suggest the measures to deal with it.”


Leveraging the true potential of our multi-level federal system represents the best way forward towards developing human capital.



Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Notify of
Inline Feedbacks
View all comments


Join us across Social Media platforms.

💥FREE for 24 Hours Prelims Notes
This is default text for notification bar