Empowering panchayats

Local bodies need more predictable revenue flows

A new study of the fiscal position of panchayati raj institutions (PRIs) by the Reserve Bank of India (RBI) should enrich the policy debate. Any comprehensive study of India’s public finance must include all three levels of government — the Union, states, and local bodies. The RBI also published a report on the state of municipal finances in November 2022. These reports on local-body finances fill an important gap in the general understanding of governance and underscore the need for more decentralisation of fiscal powers. PRIs play an essential role in developing and executing various programmes in rural areas. Since over 65 per cent of the Indian population live in rural areas, the performance of PRIs can be critical in attaining broad development goals.

India is said to have had the panchayat system from an early age, and it was dismantled during the British period. While they were reinvigorated after independence, the 73rd Amendment to the Constitution in 1992 institutionalised PRIs at three levels. According to the latest available numbers (December 2022), India has 255,623 gram panchayats. It also has 6,707 mandal panchayats and 665 zila parishads. However, financial constraints have not allowed PRIs to realise their potential. These institutions have very limited fiscal powers and are almost fully dependent on the upper levels of government for support. As the RBI’s study shows, the average revenue per panchayat in 2022-23 was Rs 21.23 lakh from all sources — taxes, grants, and others. Their own revenue from local taxes and fees was just 1.1 per cent of the total during the study period. Further, the revenue expenditure of the panchayats is lower than 0.6 per cent of gross state domestic product for all states.

It is worth noting that while reporting by PRIs has improved over the years, the data is still patchy and researchers had to reconfigure the available information. Since PRIs are mostly dependent on grants, successive Finance Commissions have made recommendations in this regard. The Fifteenth Finance Commission, for example, recommended a fixed amount of Rs 2.4 trillion for the period under its review. What seems to have affected the performance of local bodies the most is the reluctance of state governments in providing financial support. Article 243 (I) of the Constitution requires the establishment of state Finance Commissions for sharing revenue between the state government and panchayats. According to estimates, most states are lagging on this account and the allocation has also been considerably low.

It is well accepted that governance decentralisation yields better outcomes. Leaders and officials at local level are in a better position to design and execute projects based on local needs. According to estimates, globally, about 10 per cent of tax revenue accrues to local governments. In some countries, such as Finland and Switzerland, it’s more than 20 per cent. However, to be fair, there are very limited avenues of raising revenue at local levels in India. Local bodies also lack the administrative capacity to raise fiscal resources. Therefore, as things stand, while there is a need to build administrative capacity at the grassroots, mechanisms need to be developed to give local bodies a predictable and meaningful flow of revenue. This will help them to plan and execute programmes more effectively.