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 Highlights of Report

• Panchayats’ Own Sources of Revenue: They are limited, mainly property taxes, fees, and fines. 

• 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%).

• Average Revenue of Panchayats: It was at 21.2 lakh in 2020-21, 23.2 lakh in 2021-22, and experienced a slight dip to 21.23 lakh in 2022-23.

• Average Expenditure: It witnessed a decline from 17.3 lakh in 2020-21 to 12.5 lakh in 2022-23.

• Devolution of Power: There are sharp inter-state variations in the devolution of powers and functions to Panchayats. 

• Uneven Fiscal Data: An assessment of the fiscal health of Panchayati Raj Institutions (PRIs) is challenging due to the uneven availability of data on their revenues and expenditures. 

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.

About Panchayati Raj in India

• Self Government: The Panchayati Raj in India signifies the system of rural local self government. 

• Grass Root Level Democracy: Mahatma Gandhi advocated Gram Swaraj as a decentralized form of governance, serving as cornerstones of India’s political system. 

• 73rd Constitutional Amendment Act, 1992: The act has given a practical shape to Article 40 of the Constitution and has added a new Part-IX to the Constitution (from Articles 243 to 243O). 

• It also added a new Eleventh Schedule that contains 29 functional items.

• Role of Panchayati Raj in India’s Socio-Economic Development

• Rural Development: It encompasses various sectors including agriculture, rural industries, and essential social infrastructure, such as schools, clinics, roads, etc.

• Agricultural Development: PRIs implement and other initiatives boost agricultural productivity, support sustainable farming practices, and enhance the overall economic resilience. 

• SDG Localisation: The Ministry of Panchayati Raj (MoPR) is advancing the Sustainable Development Goals (SDGs) in collaboration with PRIs across rural India. 

• Women Empowerment: There is a positive and significant correlation between increased women’s participation and improved outcomes in local governance. 

Challenges Associated with Panchayati Raj in India

• Funds: There is a challenge of inadequate financial resources, heavy reliance on grants (around 95%) and discrepancies in revenue generation.

• Functions: Another concern is the lack of effective devolution of power. Also, according to the Standing Committee on Rural Development Report, the mandatory meetings of panchayats were not taking place and had poor attendance, especially from women representatives.  

• Functionaires: According to the Standing Committee on Rural Development, there is a severe lack of support staff and personnel, which affects their functioning and delivery of services.  

• Article 243G of the Constitution allows discretion to the States Governments in the matter of devolution of powers (funds, functions and functionaries) to Panchayats.

Road Ahead to Strengthening Finance Of Panchayati Raj

• Devolving 3Fs:  State governments should make adequate efforts to devolve funds, functions, and functionaries to panchayats for them to effectively plan economic development and social justice schemes.

• Timely Establishment of State FC: The report recommended that prompt establishment of SFCs, avoiding the sizable delays that occur currently. SFCs can strengthen the financial position of PRIs and help them in better delivery of their responsibilities.

• Local Revenue Generation: PRIs can improve local revenue generation and use their limited resources more efficiently and effectively through measures such as transparent budgeting and fiscal discipline, active involvement of the local community etc.

• Data Generation: The G20 Data Gaps Initiative has emphasized the necessity of addressing data gaps that are relevant to policy making. At present, the primary source of Panchayat budget information on a national scale is eGramSwaraj. 

• Improving Participation: The Standing Committee on Rural Development recommended that state governments should put a quorum in gram sabha meetings for participation of panchayat representatives, including women.