Decentralisation Is More Than Devolution: Why Local Governments Need Capacity to Govern

India has spent decades trying to move government closer to the people.

Yet moving responsibility downward does not necessarily move governing power downward.

A village may receive a new responsibility without receiving the money to perform it. A municipality may be expected to manage waste without controlling the infrastructure required to process it. A local government may be formally responsible for a service while depending on another tier of government for funds, approvals, technical expertise and administrative support.

This creates a deceptively simple problem: when does decentralisation actually become governance?

Devolution tells us who is responsible. Capacity determines whether that responsibility can actually be exercised.

The missing half of decentralisation

The usual way of thinking about decentralisation is institutional.

A function moves from the Union to the State, or from the State to a municipality or panchayat. Once the responsibility has been transferred, decentralisation appears to have happened.

But responsibility without the ability to act creates a different kind of government: one that is accountable for outcomes without controlling the means to produce them.

This is why decentralisation has to be understood as a combination of four things: authority, money, institutional capability and coordination.

Remove any one of them and the system becomes incomplete.

The constitutional framework itself separates the assignment of responsibilities from the wider question of capacity. Articles 243G and 243W allow State legislatures to endow Panchayats and Municipalities with powers and responsibilities, while Articles 243I and 243Y provide for State Finance Commissions dealing with their financial position. The Constitution of India therefore does not treat the formal assignment of functions as identical to fiscal and institutional autonomy.

A local government may have authority but no fiscal room. It may have funds but lack technical staff. It may possess both but operate inside rules designed elsewhere. Or it may have all three but face a problem that crosses administrative boundaries and cannot be solved alone.

The question, then, is not simply whether India has decentralised.

It is whether local institutions have acquired the capacity to govern the problems that have been placed in their hands.

Why the third tier is different

India’s federal debate usually focuses on the Union and the States.

That is understandable because the Constitution creates a powerful vertical relationship between the two. But many of the problems citizens encounter do not exist at that scale.

Waste collection, local roads, drainage, sanitation, water supply, land-use management and neighbourhood infrastructure are intensely local.

Their solutions often depend on information that a distant government does not possess.

A municipality knows which neighbourhood floods first. A gram panchayat knows which households are repeatedly dependent on informal sanitation services. Local officials understand which roads become inaccessible during particular seasons. Citizens know which public service actually works and which exists only on paper.

This creates an important principle of governance:

the closer an institution is to a problem, the greater its potential informational advantage.

But information alone does not create capacity.

A panchayat cannot solve a sanitation problem merely because it knows where the problem is. It needs revenue, contracts, infrastructure, technical arrangements and administrative authority.

That is where the difference between devolution and decentralisation becomes visible.

States can be the bottleneck too

There is another complication.

Decentralisation is not simply a story of the Centre transferring power to States and States then transferring it to local governments.

States themselves can become the point at which decentralisation stops.

India’s federal structure has historically been reluctant to push meaningful political and fiscal authority all the way down to panchayats and urban local bodies. The result is a three-tier structure in which the lowest tier can remain dependent on the tier above it.

The Ministry of Panchayati Raj’s Devolution Index makes this variation visible by assessing the extent of devolution to Panchayats across States. The very existence of such an assessment is important: devolution is not a binary event that happens once a function is formally assigned. Its actual extent varies across States.

This creates a peculiar institutional arrangement.

The local government is expected to solve local problems, but important parts of its capacity may remain controlled elsewhere.

The consequence is not necessarily administrative failure in every case. It is something subtler: local government becomes an implementing arm rather than an autonomous governing institution.

An implementing institution executes decisions made elsewhere.

A governing institution has enough discretion to identify a problem, allocate resources, choose between alternatives and adjust its response as conditions change.

Without that discretion, decentralisation can become administrative delegation rather than democratic decentralisation.

Fiscal capacity is where autonomy becomes real

Political authority without fiscal capacity is fragile.

A local government may technically be responsible for a function, but if most of its meaningful expenditure depends on transfers from higher levels of government, its room for independent decision-making is limited.

This is where conditional funding becomes important.

Tied or performance-linked transfers can serve legitimate purposes. Conditions can encourage revenue mobilisation, auditing, fiscal discipline and minimum standards of service delivery.

But conditions also have a trade-off.

The more narrowly money is tied to centrally or State-defined purposes, the less room a local institution has to respond to problems that do not fit neatly into those categories.

The Fifteenth Finance Commission’s recommendations illustrate the scale and design of this relationship: for 2021-26, it recommended ₹4,36,361 crore in grants for local governments, with differentiated allocations and conditions attached to portions of the grants. The point is not that conditionality is inherently a failure of decentralisation. It is that fiscal transfers can simultaneously provide resources and shape the discretion with which local governments use them.

The issue is not whether conditionality is inherently good or bad.

It is whether the balance between accountability and discretion is appropriate.

A local government needs enough flexibility to respond to local conditions, but enough accountability to prevent that flexibility from becoming arbitrary spending.

This is why fiscal decentralisation is not simply about transferring more money.

It is about giving local governments a meaningful relationship between responsibility, revenue and decision-making.

The Satara example reveals what real capacity looks like

The sanitation experience of Satara district in Maharashtra shows why assigning a function is only the beginning of decentralisation.

Satara city already had a faecal sludge treatment plant capable of handling 65 kilolitres a day, but the facility was not being used to its full potential. Four nearby villages — Jakatwadi, Songaon, Kodoli and Degaon — were subsequently connected to the facility.

The significance of the arrangement lies in what had to happen beyond the treatment plant itself.

The villages still needed a system through which households could obtain regular desludging. That required local institutions to organise the service, recover its cost and connect the resulting waste stream to infrastructure located outside the village.

The institutional arrangement therefore brought together several different capabilities. Local governments remained responsible for identifying and organising the service. A private provider could undertake specialised operations. The treatment infrastructure remained concentrated at the urban facility. A formal agreement between the Panchayat Samiti and the municipal council provided the link between the two levels.

The important lesson is not simply that one government helped another.

It is that different parts of the same public-service chain can require different institutional capacities.

The village is well placed to understand household-level demand. The city has an existing treatment facility with greater economies of scale. A private operator can provide a specialised service. An inter-governmental arrangement can connect these capabilities.

In other words, the relevant question is not always, “Which government should own the entire function?”

It can instead be, “Which institution is capable of performing each part of the function, and how are those parts connected?”

That is a more demanding idea of decentralisation.

Sometimes the right answer is to pool capacity

The Satara experience also points to a broader principle: local autonomy does not require every local government to build every facility itself.

Small villages may not generate enough demand to make specialised infrastructure viable on their own. In such cases, a shared facility can allow several local governments to retain responsibility for their residents while using infrastructure organised at a larger scale.

Mayani in Maharashtra illustrates this alternative. The gram panchayat has considered scheduled desludging through private operators or self-help groups, while a cluster-level faecal sludge treatment plant has been planned to serve around 80 surrounding villages.

The distinction matters.

The objective of decentralisation is not to reproduce an entire administrative system inside every village or municipality. Doing so can fragment infrastructure and raise costs.

Instead, local governments can retain the functions that depend on proximity to citizens while sharing facilities or technical capabilities that benefit from scale.

This becomes increasingly important because administrative boundaries rarely correspond neatly with the systems governments are expected to manage.

Waste does not respect municipal boundaries.

Water does not respect district boundaries.

Transport networks do not stop at the edge of a panchayat.

Local governance therefore increasingly requires institutions that can cooperate without losing local accountability.

The deeper problem is not size. It is institutional fit.

This changes how we should think about the ideal size of government.

There is no universal rule that every problem should be solved at the lowest possible level.

Some problems are genuinely local.

Others require economies of scale.

Still others require coordination across multiple jurisdictions.

The better question is:

At what institutional scale can this function be governed most effectively, and what capacities must exist at each level?

That shift is crucial.

A city may be best placed to operate a treatment plant because it has the scale and technical capacity to do so.

A village may be better placed to identify households requiring desludging because it is closer to residents.

A private operator may be better placed to provide specialised transport.

A higher-level authority may be needed to establish standards or resolve disputes.

Good decentralisation is therefore not the disappearance of higher levels of government.

It is the deliberate distribution of authority and capacity across levels.

This is where Indian federalism needs to go next

India’s federal conversation has traditionally revolved around the relationship between the Union and the States: taxation, grants, centrally sponsored schemes, Governors, legislation and the distribution of constitutional powers.

Those questions remain important.

But there is another federal frontier below the State.

The effectiveness of decentralisation increasingly depends on whether States themselves are willing and able to create capable local institutions.

That means thinking beyond the formal transfer of functions.

A local government needs predictable resources.

It needs professional personnel.

It needs access to technical expertise.

It needs authority over the decisions for which it is held accountable.

It needs institutional relationships with neighbouring jurisdictions.

And it needs enough discretion to adapt policies to local conditions.

Without these, decentralisation can create the appearance of proximity without the substance of autonomy.

The paradox of local government

There is a deeper paradox here.

The more complex India’s development problems become, the more important local institutions may become.

But complexity also makes local problems harder to solve through isolated local governments.

Climate risks cross municipal boundaries. Urban expansion spills into rural areas. Waste systems require regional infrastructure. Water systems connect multiple jurisdictions. Migration changes the demand placed on local services.

So the future of decentralisation cannot simply be more power to smaller units.

It has to be better-designed power across connected units.

Local autonomy and institutional coordination must grow together.

Too little autonomy and local governments cannot respond.

Too little coordination and local governments cannot solve problems that cross boundaries.

The objective is neither centralisation nor fragmentation.

It is institutional fit.

From devolution to governability

This is the larger transformation hidden inside India’s decentralisation debate.

The first generation of decentralisation asked:

Who should perform this function?

The next generation has to ask:

What does that institution need in order to govern it well?

That is a fundamentally different question.

A panchayat with responsibility but no revenue is not fully empowered.

A municipality with infrastructure but no coordination mechanism cannot manage a regional system.

A local government with funds but no technical capacity may simply spend rather than govern.

And a system that transfers responsibilities without transferring the ability to make decisions merely moves accountability downward while keeping power upward.

The real test of decentralisation is not how many functions have been devolved.

It is whether citizens can identify a local institution that has the authority, resources and capability to solve the problems closest to them.

India’s federalism will not become deeper merely by adding another layer of government.

It will become deeper when that layer can actually govern.