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 the devolution of power through a national urban renewal scheme have not succeeded for three reasons. The first is that India’s decentralization process is incomplete. 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 revenue—has been devolved. The second reason is that decentralization has been undertaken in a top-down manner, which has exacerbated Center-state relations 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 to them. Additional effort needs to be directed towards an effective model of cooperative federalism. With 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 are an important guide to the future of cities in India as well as in other federal countries

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