A Study of Fiscal Decentralization and Local Government Finance in India: Emerging Trends, Challenges, and Policy Implications

This study explores the current landscape of fiscal decentralization in India, with particular attention tothe financial structure and functioning of rural and urban local government bodies. It investigates thecomposition and trends of own-source revenues versus intergovernmental transfers, the extent of fiscalautonomy enjoyed by local institutions, and the institutional and policy challenges that hinder effectivedevolution of financial powers. Drawing upon secondary data, government reports, and existing scholarlyresearch, the paper analyses persistent vertical and horizontal fiscal imbalances, variations across states, andthe implications of limited fiscal capacity on local governance and service delivery. Furthermore, the studyidentifies critical policy gaps, administrative bottlenecks, and capacity constraints that undermine the objectivesof decentralized governance. It concludes by proposing strategic reforms to strengthen fiscal empowerment,improve transparency and accountability, and enhance the overall effectiveness of India’s multi-tiered fiscalframework