GS Paper II

News Excerpt:

The Reserve Bank of India (RBI) recently released its “Finances of Panchayati Raj Institutions” report.

Key highlights of the report:

• This report has been prepared in the Division of Local Finances in the Department of Economic and Policy Research.
• It draws upon data on 2.58 lakh Panchayats for the years 2020-21 to 2022-23, it presents an assessment of their finances and their role in India’s socio-economic development.
• There are sharp inter-state variations in the devolution of powers and functions to Panchayats, with states having higher devolution levels exhibiting better outcomes in health, education, infrastructure development and, in recent years, water supply and sanitation.

Challenges faced by Panchayati Raj Institutions (PRIs):

• Panchayats’ own sources of revenue are limited, mainly property taxes, fees, and fines - around 95% of their revenues take the form of grants from higher levels of government, restricting their spending ability that is already hampered by delays in the constitution of State Finance Commissions.
• An assessment of the fiscal health of PRIs is challenging due to the uneven availability of data on their revenues and expenditures.

PRIs vis-a-vis Climate change:

• Due to their proximity to communities and possession of valuable local knowledge about the environment, PRIs are well-equipped to identify climate-related risks and devise effective adaptation strategies.
• PRIs can facilitate the adoption of climate-resilient farming methods and promote renewable energy sources like solar panels and biogas plants, thus reducing reliance on fossil fuels and mitigating climate change.
• A part of the grants-in-aid from the upper tiers of the government could be linked to climate resilience efforts of PRIs.

Suggestions provided by the report:

• PRIs can use their limited resources more efficiently and effectively through measures such as transparent budgeting and fiscal discipline, active involvement of the local community to prioritise development needs, staff training, robust monitoring and evaluation processes, prudent asset management, raising public awareness and adopting digital tools.
• Panchayats need to intensify their efforts to augment their own tax and non-tax revenue resources and improve their governance.
• Reporting their finances in standardised formats would strengthen fiscal transparency and accountability at the Panchayat level.
• State Finance Commissions (SFCs) can strengthen the financial position of PRIs by tabling their action-taken reports in state legislatures, thereby aiding in better delivery of their responsibilities for the upliftment of the rural economy.
• It is imperative to empower local leaders and officials by providing them with ample and diverse funding sources, promoting greater decentralisation, implementing capacity-building programs, and upgrading infrastructure.
• There is also a need to raise citizens’ awareness about the functions and significance of PRIs by encouraging their increased participation in local governance processes and by enhancing people-centric administration and communication.