Fiscal decentralization

Urban financial management, hinges basically on the level of decentralization  of the government machinery of a country.

Fiscal decentralization refers to the process of transferring fiscal responsibilities and resources from central government authorities to lower levels of government, such as regional or local governments. It involves devolving financial decision-making powers, including revenue collection, expenditure management, and borrowing, to subnational levels of government.

The main objectives of fiscal decentralization are to enhance the efficiency and effectiveness of public service delivery, promote local development and accountability, and empower local communities to participate in decision-making processes. Some of the key benefits of fiscal decentralization include:

1. Local responsiveness: Decentralization allows local governments to be more responsive to the specific needs and preferences of their communities, leading to better-targeted and more effective public services.
2. Improved efficiency: Decentralization can lead to improved efficiency in public service delivery as local governments are better equipped to identify and respond to local needs, resulting in better resource allocation and utilization.
3. Local accountability: Fiscal decentralization can increase the accountability of local governments to their citizens, as they are responsible for managing and delivering public services at the local level.
4. Local capacity building: Fiscal decentralization can help to build the capacity of local governments to manage public finances, which can promote sustainable development at the local level.

However, there are also potential challenges associated with fiscal decentralization, such as the risk of increased inequality between different regions, the potential for corruption at the local level, and the need for adequate financial and administrative capacity at the subnational level.

Fiscal decentralization consists primarily of devolving revenue-sources and expenditure-functions to lower levels of government. By bringing the government closer to the people, fiscal decentralization is expected to boost public sector efficiency as well as accountability and transparency in the service delivery and policy-making. However, decentralization also entails greater complexity in inter-governmental fiscal relation and coordination.

To enhance fiscal decentralization, the following requirements must be maintained

• Sources of finance must be specified for projects or areas of expenditure;
• Central Government must keep the fiscal decentralization rules that it makes;
• Administrative capacity of the sub-national levels to deliver on their mandate;
• Establishment of monitoring mechanism to ensure accountability;
• Quarterly financial report to regional and national levels;
• Develop performance service and accountability standards;
• Develop formats to guide regional and local policy monitoring.

Overall, fiscal decentralization is a complex process that requires careful planning, coordination, and monitoring to ensure its success. It can have significant impacts on the economic, social, and political development of countries and regions, and is a critical component of effective governance and public service delivery.

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FD Planning Community Forum Discussion

• State Finance Commissions and Rural Local Bodies Devolution of Resources
• Interview with B K Sinha – The Municipal midas
• Municipal bond in India
• Bilateral and Multi-lateral Financial Institutions
• Cost recovery
• Investment needs and Budgeting for Infrastructure and Service in Metro towns
• Subsidy Reduction
• Revenue Sources of Controlling Authorities
• Public Private partnership



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