These numbers suggest our need to build the architecture of fiscal performance and consolidation. The better units have to become models for the average. National- and state-level agencies have to structure reform to use such experiences as examples for prudence- and rule-based policies. 

Investment finance for rural infrastructure is essential. Efforts to help create healthy balance sheets for local institutions will help them present a rating and a borrowing-risk attractive to financial institutions, which can then be approached for underwriting expansion. The moral of our story is that if the success stories are made models for incentivisation, local bodies would soon meet current expenditures and be in a position to productively borrow — if the Treasury conducts reform permitting it. But it is slow. For example, a policy for urban borrowing is still under preparation. It is easier to buy the bond of a foreign local body than an Indian one.

Financial reform for local bodies and SHGs (as well as newer financial product companies for rural areas) is urgent.

Local bodies will also have to make the rupee go far. Recent studies where panchayats are compared and relative effectiveness measured need attention. Financial restructuring needs institutions which build instruments and collateral for communities and small producers on whom the real — and not the derivative! — economy rests. This market is very robust in India today, as the experience of groups like Basix and IFMR shows. There are synergies between relaxing constraints in local-level spending and getting out of the crisis.

... contd.