Context: Recently, RBI released a report titled ‘Finances of Panchayati Raj Institutions’ which is based on the data of 2.58 lakh Panchayats for the years 2020-21 to 2022-23, covering about 75% of rural local bodies.
The report presents an assessment of panchayat finances and their role in India’s socio-economic development.
Fiscal source of Panchayats:
Types of Grants received by Panchayats
Fiscal issues and challenges in Panchayat finances:
- Limited own source of revenue: Panchayat’s own sources of revenues are limited, mainly property taxes, fees and fines. This restricts the financial autonomy of Panchayati Raj institutions and restricts their spending ability.
- Heavy dependence on grants-in-aid: Grants from higher level of governments such as Finance Commission and State Finance accounts for a total of 95% of the revenue receipts of the panchayats. Note: Grants from the Central Finance Commission has consistently increased for panchayats since the 73rd Constitution Amendment Act.
- Issues with State Finance Commission:
- This over-dependence on vertical transfers is not predictable as states continuously delay the constitution of State Finance Commission. Ministry of Panchayati Raj has highlighted that only 9 states have constituted their SFC by 2022 whereas the scheduled timing in 2019-20.
- State governments have even not adhered to its recommendation regarding devolution of financial aspect to panchayats.
- Performance gap in both tax and non-tax revenues: tax portion of revenue just 1.1% of total revenue whereas non-tax is 3.3%.
- Lack of fiscal prudence: the ratio of revenue to capital expenditure averaged 3.2 in 2022-23 and the ratio varied between 0.1 in Bihar and 11.5 in Tripura. Investment in capital projects was 29.6% of the total expenditure of Panchayats in 2022-23.
- Distribution disparity: There are notable differences in the distribution of grants-in-aid to PRIs across states and years.
- Various other challenges like inhibition of Panchayat leaders in imposing and collecting taxes, lack of devolution of taxation powers by state government, etc. also exist.
Composition of capital expenditure by panchayats:
Way Forward:
- Intensification of efforts by panchayats to augment their own tax and non-tax revenue. Ex: Velpur Gram Panchayat in the Nizamabad district in Telangana effectively generated revenue from internal sources.
- Timely establishment of SFCs and prudent adherence to its recommendations.
- Operational changes in PRIs like transparent budgeting, fiscal discipline, e-governance, robust monitoring and evaluation process, reporting of finances in standardized formats (e-gram swaraj portal), etc.
- Empowerment of local leaders and officials, active involvement of the local community to prioritise development needs, etc.