FINANCES OF PANCHAYATI RAJ INSTITUTIONS (PRIs)

Posted 15 Feb 2024

Updated 22 Mar 2024

5 min read

Why in the news?

Recently, the Reserve Bank of India (RBI) released its report titled “Finances of Panchayati Raj Institutions”. The report discusses the fiscal position of PRIs for the years 2020-21 to 2022-23.

About Panchayati Raj Institutions and their finances

73^rd Constitutional Amendment Act 1992: institutionalised the PRIs at three levels i.e.,
- Mandate for setting up of Panchayats is provided by Article 243 in Part IX of the Constitution of India.
- Panchayats, being Local Government, is a State subject.
Number of PRIs: There are a total of 2.62 lakh PRIs in India, with 2.55 lakh Gram Panchayats, 6,707 Mandal Panchayats and 665 Zila Parishads as of October 2023.
Constitutional Provisions for Financial Empowerment of Panchayats
- Article 243H: Provides for finance for the Panchayats by securing authorization from State Legislatures for grants-in-aid to the Panchayats from the Consolidated Fund of the State.
  - It empowers panchayats to impose, collect, and allocate taxes, duties, tolls, and fees.
- Article 243-I: Setting up a Finance Commission (FC) every 5 years to review the financial position of Panchayats and make recommendations to improve their financial position.
- Article 280(3)(bb): Mandates FCs to recommend measures needed to augment the Consolidated fund of the state and supplement panchayat resources to the President.

Sources of Finance for PRIs
Internal/Own sources of revenue	Tax Revenue from Property tax on lands (other than Agriculture Land) or buildings or both; Taxes on Duties and Commodities; Service tax; Taxes on Profession Trades etc. Non tax revenue from market fees on persons exporting goods for sale in Panchayat area; Fees on Registration of Cattle sold within the Panchayat area etc.
Transfer of Funds from Central Finance Commission (CFC) and State Finance Commission (SFC)	Tied Grants: Earmarked for specific purposes or sectors, like sanitation, education etc. Untied Grants (General purpose grants): These are provided without specific conditions or restrictions and can be utilised for local needs and priorities. Performance-based Grants: Additional funds granted to PRIs based on recommendations of CFCs and specific performance criteria. Special Category Grants: These grants are additional financial support designed to address unique challenges or particular needs of PRIs in specific regions or contexts.
Other Sources	Transfer from Central Government and State Government under different schemes like MGNREGA, PMAY (Rural), Sansad Adarsh Gram Yojana etc. Grants from internationals bodies like World Bank, etc.

Challenges associated with the finance of PRIs

Structural challenges: Inadequate financial resources, heavy reliance on grants from upper tiers of government; and weak infrastructure impede the functioning of PRIs.
- Around 95 % of their revenues come from grants by higher levels of government.
Inconsistency in data: Assessment of the fiscal health of PRIs is difficult due to a lack of data on their revenues and expenditures and a lack of skilled staff to maintain data in standardised formats.
- Audit reports have been generated for only 46% of Gram Panchayats for 2019-20.
Tax revenue: Sources of revenue for PRIs are limited, mainly property taxes, fees, and fines.
- They face challenges in raising tax revenue due to a limited tax base, shortage of staff and adequate infrastructure along with a lack of clear guidelines for introducing new taxes.
Corruption: Instances of misuse of funds for personal gain have hindered the ability of PRIs to effectively carry out their roles and responsibilities.
- For example, Rs 1.58 crore was diverted from the gram panchayat account without prior permission from the panchayat body and higher officials in Vijayawada.
State Finance Commissions (SFC): As per rural development and Panchayati raj report, only 9 states have been constituting SFCs regularly, and out of them, only two are active.

Initiatives taken to improve financial ecosystem of PRIs.

e-Gram Swaraj: It assist in enhancing the credibility of Panchayats which would induce greater devolution of funds to PRIs as well as provide a platform for effective monitoring by higher authorities.
Gram Panchayat Development Plan (GPDP): It is an annual exercise carried out by Ministry of Panchayati Raj (MoPR) in all Gram panchayats and other local self-governance bodies where GP development plans are prepared in a participatory manner under people’s Plan Campaign.
Capacity Building- Panchayat Sashaktikaran Abhiyan (CB-PSA): It had provided assistance to the States/ UTs for capacity building and training of Panchayat Elected Representatives to enable them to perform their functions, including planning and implementation of development programmes, effectively and efficiently.
Rashtriya Gram Swaraj Abhiyan (RGSA): It aims to strengthen capacities of institutions for rural local governance to become more responsive towards local development needs, and efficiently utilise available resources for realizing sustainable solutions to local problems linked to SDGs.

Way forward

Budgetary support: Increase budgetary allocations from higher levels of government to ensure PRIs have sufficient resources to fulfil their responsibilities. Also, steps should be taken to diverse funding sources of the PRIs.
Skilling: Training and capacity-building of PRI members to enhance their financial management skills, ensuring effective and transparent handling of funds.
Accountability: Enforce strict financial accountability measures, regular and independent audits, and transparent reporting mechanisms to prevent misuse of funds and corruption.
Strengthening SFC: SFCs should be constituted timely every 5 years and reports should be tabled in state legislatures regularly. It can fortify the financial position of PRIs and help them in better delivery of their responsibilities.
Awareness: Raise citizen’s awareness about the functions and significance of PRIs by encouraging their increased participation in local governance processes.