Strengthening panchayats: Building fiscal autonomy, institutional capacity

A meeting between the Centre and states recently highlighted the weak own-source revenue (OSR) base of gram panchayats, limiting their financial autonomy. This is important because the government is expected to roll out model OSR guidelines for 262,000 gram panchayats to help states frame or update rules for taxation and non-tax revenue collection. However, strengthening panchayat finances requires addressing deeper structural constraints that have kept local governments dependent on grants.

 

Despite being responsible for delivering basic services and implementing development programmes, panchayats generate very little revenue of their own. The data from the Ministry of Panchayati Raj shows that between 2017-18 and 2021-22, panchayats across 30 states and Union Territories collected ₹25,595 crore as OSR, amounting to just about ₹59 per capita annually. About 42 per cent of the gram panchayats collected less than ₹1 lakh as OSR in FY22, while the average annual OSR of the gram panchayats was around ₹2.3 lakh. The disparity across states is also striking. OSR accounts for just 1 per cent of the receipts of the gram panchayats in Uttar Pradesh, as against 40 per cent in Andhra Pradesh.

 

The problem is not merely a lack of revenue sources but also weak capacity to utilise existing powers. Many states have empowered panchayats to levy taxes, fees and user charges, but collection remains negligible. Property tax, one of the most important potential sources of local revenue, remains underdeveloped because of weak property records, outdated assessment systems, and poor enforcement. According to a study of panchayat finances conducted by the National Institute of Public Finance and Policy (NIPFP), property tax accounted for around 40 per cent of OSR among local bodies across the world, highlighting its potential as a stable source of revenue. Revenue mobilisation is closely linked to the economic environment of villages. Panchayats with larger populations, greater commercial activity, and higher incomes have a stronger tax base. Panchayats closer to towns also performed better because of greater economic activity and higher property values. This explains why southern and western states have generally outperformed northern states, aided not only by stronger economies but also by clearer rules and better administrative systems.

 

At the same time, financial self-reliance cannot mean that grants become less important. Poorer villages with limited economic activities cannot be expected to generate revenues comparable to economically stronger panchayats. Transfers from the Centre and states will remain essential for ensuring equity. The objective should be to ensure that grants supplement, rather than substitute, local revenue generation. The government’s proposed OSR guidelines and performance-linked grants under the Sixteenth Finance Commission are steps in the right direction. But fiscal empowerment requires more than standardised rules. Panchayats need trained personnel, digital systems for tax administration, better management of common assets such as ponds and markets, and greater autonomy in deciding local priorities. Thus, overall, there is a strong case for empowering panchayats with greater decentralisation, improved fiscal powers, and capacity building.