MC EXCLUSIVE Foster sub-national autonomy, strengthen local revenue base: OECD suggestion to 16th Finance Commission

Stronger local revenue base at the local levels will be crucial

The Organisation for Economic Co-operation and Development (OECD) has suggested India’s 16th Finance Commission to enhance the capacity of local governments to deliver quality public services and promote greater fiscal autonomy at the sub-national level.

OECD is an intergovernmental organisation that works to shape policies promoting economic growth, stability, and improved living standards through research, analysis, and policy dialogue.

Sean Dougherty, Senior Advisor at OECD, told Moneycontrol in an interview that better-designed fiscal transfers, stronger local revenue bases and increased fiscal autonomy at the local levels will be crucial for fiscal sustainability and improved service delivery.

“We encouraged the 16th Finance Commission to foster sub-national autonomy and boost the capacity of local governments to deliver good quality public services. Strong tax design, like GST (Goods and Services Tax) reforms, are also important to strengthen revenue bases in a non-distortionary way,” he said. The 16th Finance Commission, chaired by Arvind Panagariya is expected to submit its report by October 31.

Dougherty noted that India, with its strong growth rate and relatively lower debt levels, is better-positioned than many OECD economies, but strengthening local public finance remains key. “India is in a better position than many OECD countries because its growth rate is the strongest among the economies we cover. That, in turn, helps make existing debt more sustainable. Prudence, good quality public expenditure and governance levers to foster incentives are essential,” he added.

He emphasised that fiscal federalism reforms, supported by efficient tax design, can significantly improve expenditure quality at the sub-national level.

“Giving sub-national governments as much autonomy as possible with adequate resources and fewer strings attached is generally a good principle — but it has to come with good monitoring and consequences for misuse of revenues. Benchmarking can facilitate better quality expenditure,” Dougherty said.

AI productivity boom

Dougherty highlighted that artificial intelligence (AI) could play a pivotal role in strengthening fiscal capacity and public sector productivity, potentially unleashing a productivity boom within the next 5-10 years.

“The scenario I find most plausible is that it would be at least as big as the ICT (Information and Communication Technology) revolution, with the rollout of the personal computer — or even faster. For me, that’s the baseline. There’s even a possibility for more rapid adoption and a more impressive impact on the bottom line for both the private and public sectors,” he said.

ICT revolution refers to technologies including the internet, wireless networks, computers, software, etc.

He added that the public sector could particularly benefit from AI adoption.

“In the public sector, it is particularly exciting because we have seen really intense challenges with debt dynamics in many countries after COVID; in some, almost becoming unsustainable. If we really see this optimistic scenario for the impact of AI, that could help address a lot of these problems, and, at the same time, boost people’s incomes and well-being,” he said.

Dougherty noted that some of the most optimistic observers talk about AI’s impact being felt in just a few years, but more likely scenarios are within a 5-10 year horizon.

“Some of the most optimistic observers talk about a few years — that’s probably over-optimistic. More likely scenarios might be 5-10 years to realise an important bulk of the benefits. At the same time, things are advancing very rapidly, both in terms of model capabilities and their deployment across sectors,” he explained.

No mass unemployment

Dougherty said AI is unlikely to cause widespread job losses, but will shift the nature of work and tasks performed by workers.

“We don’t really see mass unemployment as a consequence of AI. It’s much more about shifting the tasks that workers do. But that’s conditional on governments being active and the private sector also responding,” he said.

He emphasised the importance of experience and judgement in effective AI adoption. “What’s interesting is that it requires judgement to use AI — and often that means experience. More experienced workers are best attuned to figure out how AI can contribute in a useful way.

Sometimes junior workers, who don’t have as much experience, just take the AI at face value. For example, in journalism, it might mean plagiarism rather than using it as an aid to refine writing,” he said.

Bottom-up adoption more effective

Dougherty stressed that bottom-up adoption of AI works better than top-down strategies in organisations.

“Organisations have struggled a lot with top-down adoption. When they try to say, ‘let’s apply AI to all of our businesses’, it doesn’t work. But when they provide good guidelines and give a green light for specific applications, incentivising workers to use them, that works much more effectively.

Bottom-up adoption — where people tinker, learn from colleagues, and lead within their teams — is a better way to integrate AI into thinking processes,” he said.

Emerging market advantage

Dougherty said AI has the potential to transform a range of tasks -- from coding and finance to manufacturing and healthcare.

“We’re focusing on tasks rather than jobs — which tasks can be most effectively accelerated with AI. Coding, finance, administrative back-office processes like billing, radiology, and many healthcare tasks are promising. If you integrate AI with robotics, you can accelerate a whole range of manufacturing sectors too,” he said.

He pointed out that AI can sometimes narrow skill gaps, if deployed smartly, especially in emerging markets like India.

“Interestingly, AI can sometimes narrow skill gaps. Workers or organisations that learn to tinker with it and integrate it well can see boosts even among those with skill deficits. In a country like India, that could be a silver lining if education and apprenticeship systems can match AI with people’s skill gaps,” Dougherty said.

He noted that emerging economies may even have advantages in AI adoption.

“Some emerging economies are, in some ways, more advanced because they’re more willing to tinker and try things out. They face big capacity problems, so they’re deploying these tools faster and are willing to tolerate some failure — and they’re getting some interesting successes,” he said.

SME adoption barriers
Dougherty also underlined the need for government support to help small and medium enterprises (SMEs) overcome AI adoption barriers.

“Government measures to lower barriers to adoption — like making specialised models available and helping with GPU capacity — can foster good access for smaller businesses. Some may not have the capacity to figure out how to use it, so outreach through education, apprenticeships, and AI-enabled vocational training on a broader basis can help bridge skill mismatches and reach the informal sector,” he said.