GS Paper II

News Excerpt: 

According to the recent findings by RBI, only 1% of the revenue of panchayats was earned by them, with the rest being raised as grants from the State and the Centre.

More about the news:

• Specifically, 80% of the revenue was from Central government grants; only 15% was from State government grants. 
• Consequently, the revenue raised by panchayats formed a minuscule share of the States’ own revenue.

Statistics about Panchayats and their revenues:.

• The recently released report by the Reserve Bank of India on the finances of Panchayati Raj Institutions for 2022-23 states the following: 
• Panchayats had recorded a total revenue of ₹35,354 crore in 2022-23. And ₹737 crore was earned by their own tax revenue. 
• Panchayats earned ₹1,494 crore through non-tax revenue, which is mostly earnings from interest payments and Panchayati Raj programmes.
• Panchayats earned ₹24,699 crore as grants from the Central government and ₹8,148 crore as grants from the State governments.
• In 2022-23, each panchayat earned just ₹21,000 as its own tax revenue and ₹73,000 as non-tax revenue. 
• And each panchayat earned about ₹17 lakh as grants from the Central government and more than ₹3.25 lakh as grants from the State governments. 
• There are wide variations among States, when we look at the average revenue earned per panchayat in 2022-23.
• In Andhra Pradesh, revenue receipts of panchayats formed just 0.1% of the State’s own revenue.
• The revenue of panchayats in Uttar Pradesh formed 2.5% of the State’s own revenue, the highest among States.

Major reasons behind poor finances of Panchayats:

• Poor Revenue Generation: Panchayats’ 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, which are generally hampered by the delays in the constitution of State Finance Commissions.
• Lack of Data Organization and Political will: A comprehensive evaluation of Panchayats’ fiscal position and quality of expenditure is constrained by the lack of adequate and appropriate data.
• There are more instances of non-reporting for revenue expenditure relative to revenue receipts, while the reporting for capital receipts and capital expenditure is even poorer.
• Delayed State Finances and Lack of support: Due to dependence on the Centre and the State for their funds, most panchayats suffer from interference from the top two tiers of the system.

What needs to be done to improve Panchayats revenues:

• Augment Own-taxation and Non-tax revenue sources: Panchayats need to intensify their efforts to augment their own tax and non-tax revenue resources and improve their governance for sustainable growth.
• 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 prioritize development needs, 
• Staff training, robust monitoring and evaluation processes, 
• Prudent asset management, 
• Raising public awareness, and Adopting digital tools.
• Address Process Inefficiencies: Panchayats should report their finances in standardised formats that would strengthen fiscal transparency and accountability at the panchayat level, thereby contributing to the empowerment of panchayats.
• Empower Panchayats to raise revenues: It is imperative to empower local leaders and officials by providing them with ample and diverse funding sources, promoting greater decentralization, implementing capacity-building programs, and upgrading infrastructure.

Way forward: 

• The financial health of Panchayats in India is primarily dependent on grants, posing challenges to their autonomy. 
• Panchayats should diversify revenue, adopt transparent practices, engage communities, and enhance fiscal discipline. 
• Standardized reporting and empowerment through diverse funding sources, decentralization, and capacity-building are crucial for fostering effective local governance and rural development.