Finances of Panchayati Raj Institutions

General Studies Paper -2

Context: Recently, the Reserve Bank of India released a report on Finances of Panchayati Raj Institutions (PRIs) for 2022-23 which presents an assessment of their finances and their role in India’s socio-economic development.

Key Findings of the Report

• About 1% of the revenue of Panchayats was earned by them, with the rest being raised as grants from the State (about 15%) and the Union Government (about 80%).
• Panchayats had recorded a total revenue of ₹35,354 crore in 2022-23.
• In 2022-23: Each panchayat earned just ₹21,000 as its own tax revenue and ₹73,000 as non-tax revenue.
• Each panchayat earned about ₹17 lakh as grants from the Central government and more than ₹3.25 lakh as grants from the State governments.
• Panchayats earned ₹1,494 crore through non-tax revenue, which is mostly earnings from interest payments and Panchayati Raj programmes.
• They earned ₹24,699 crore as grants from the Union Government and ₹8,148 crore as grants from the State governments.
• State Wise Performances: In Kerala, the average revenue raised by each panchayat was over ₹60 lakh in 2022-23.
• West Bengal came a close second with an average revenue of ₹57 lakh per panchayat.
• The revenue was over ₹30 lakh per panchayat in Assam, Bihar, Karnataka, Odisha, Sikkim, and Tamil Nadu; and less than ₹6 lakh in Andhra Pradesh, Haryana, Mizoram, Punjab, and Uttarakhand.
• The revenue receipts of panchayats formed just 0.1%of the State’s own revenue in Andhra Pradesh.
• The revenue of panchayats in Uttar Pradesh formed 2.5%of the State’s own revenue, the highest among States.

Functions and Finances of the PRIs in India

• Until 1992, the responsibilities of the PRIs were primarily focused on sanitation efforts, conservancy services, building and maintaining fair-weather roads, access to domestic water supply, and street lighting.
• In 1992, the 73rd Amendment introduced a significant change, specifying 29 subjects (outlined in the Eleventh Schedule of the Constitution) for which Panchayats were entrusted with the responsibility of devising and executing plans aimed at fostering local economic development and social justice. It empowers the local self-governing institutions viz. PRIs.

Fundings of PRIs

• PRIs have their own resources of tax and non-tax revenue (e.g., fair tax, building tax, fees, rent on land and buildings, water reservoirs, etc.) and capital receipts from the sale of land.
• They receive funds from the Union and State Government in the form of grants-in-aid/loans for general administration, implementation of developmental schemes/works, and creation of infrastructure in rural areas, etc.
• Funds are also provided under the recommendations of the State Finance Commission.

Challenges and Constraints highlighted in the report

• Limited Own Revenues:Panchayats rely on limited sources like property taxes, fees, and fines, which constitute a minor share of their revenue.
• Own revenues, generated through local taxes, contribute only about 1.1% to their total revenue in 2022-23.
• Low Expenditure:The revenue expenditure of panchayats is less than 0.6% of the gross state domestic product for all states.
• Grant Dependency: Approximately 95% of Panchayats’ revenues come in the form of grants from higher government levels, limiting their financial autonomy.
• Inter-State Variations in Devolution:There are significant variations in the devolution of powers and functions to Panchayats across states.
• States with higher devolution levels show improved socio-economic outcomes.
• Inconsistency in Data:The assessment of the fiscal health of Panchayati Raj Institutions is hindered by inconsistent data on their finances.
• Challenges in Local Tax Revenue Generation:Panchayats face challenges in generating local tax revenue due to a limited tax base, administrative infrastructure shortages, lack of trained staff, and unclear guidelines.

Way Forward and Conclusion

• The RBI report suggests several measures to improve the fiscal position of PRIs, such as boosting revenue-generating capabilities, effectively implementing Article 243 (I)for fair revenue sharing through established Finance Commissions, strengthening local administrative skills for better financial management, and promoting decentralisation.
• PRIs bridge the gap between the rural population and the higher levels of government. They are the most appropriate institutions for grassroots development.
• These need to devise innovative approaches for generating adequate revenue.
• The recommendations of the Finance Commissions and the recent digital initiatives have collectively enhanced transparency and accountability at the Panchayat level, thereby contributing significantly to the empowerment of Panchayats.
• According to Mahatma Gandhi, ‘Independence must begin at the bottom. Thus, every village will be a Republic or Panchayat having full powers’.