(co-author with Amarnath HK)

The latest RBI Report on the “Finances of Panchayati Raj Institutions 2020-21 to 2022-23” sheds some light on the powers and functional responsibilities of the most localized level of governance, i.e., Panchayati Raj Institutions (PRIs) and addresses a critical gap in their revenue needs. A study on the fiscal health of the PRIs assumes greater importance in the Indian context since the population residing in the rural areas (955,843,497) significantly exceeds that in the urban parts of the country. The Report also highlights the significant dependence of these PRIs on the fiscal transfers made by the higher tiers of the government. As per the Report, during the period 2020-21 to 2022-23, almost 95% of the total receipts of the Gram (or Village) Panchayats (GPs) across the country constitute grants from the Central and the State governments, with the Central government constituting a bulk of the share.

In addition to the administrative and civic functions (maintenance/repair of roads, construction of drains, street and drain cleaning, provision of drinking water, repair/maintenance of capital assets, among other activities), the Eleventh Schedule of the Constitution devolves to the GPs 29 subjects, ranging from adult and non-formal education to women and child development. However, neither the GPs are empowered to recruit the required manpower for effective service delivery under these subjects nor levy any fees or user charges for accomplishing these tasks at hand. This further leads to a perceptible imbalance between the funds available and functions devolved to the GPs, which, in turn, increases the dependence on the devolution from the Central and State governments.

While the role of the Central government is debated time and again with respect to the sufficiency of the devolutions made to the GPs, it is essential to understand that these devolutions have kept the three tiers of the rural governments sustained for a long time. In the Indian case, the literature also favours the existence of a flypaper effect at the sub-national level, with the impact more significant in low-income states. The role of the State government, however, varies starkly across states. While the Constitution stipulates the formation of a State Finance Commission (SFC) every five years to recommend the devolution from the State government to the local bodies, only 18 states have set up either their 4th, 5th or 6th SFC, with nine states still having constituted either of the first three SFCs in the last few years. Though the share of State government grants lags behind that of the Union government, some states have truly displayed the spirit of decentralization (Karnataka and Kerala, for instance), especially at the lowest tier of governance, i.e., GPs.

One of the effective methods to augment the existing resources of the GPs is the sharing of the tax revenues that are levied and collected at the state level but are passed on to the local bodies. These comprise surcharges on stamp and registration fees, entertainment taxes and profession tax, among others. Stamps and registration fees, which are levied on the sale and purchase of land and properties (as a share of the State’s own tax revenue), constitute an average of 0.35% for the period 2010-11 to 2022-23 (RBI) for 31 States/UTs. While states such as Karnataka, Andhra Pradesh and Telangana assign the proceeds of stamps and registration fees to not only their ULBs but also the PRIs in the State, states such as Uttar Pradesh only devolve the proceeds of the stamp duty to the ULBs in the State, with no devolution being made to PRIs. Interestingly, the revenue of Andhra Pradesh from stamps and registration fees (as a share of its own tax revenue) only constituted 0.43% for the period 2010-11 to 2022-23 (BE), as against Uttar Pradesh, where the ratio was 0.66%. As the grants-in-aid from the Central and State governments result in asset creation, any addition to GPs’ revenues from the sharing of State taxes will help them to create and maintain these assets. An overall improvement in the basic facilities in the vicinity of the rural areas would also lead to more property transactions in rural areas and an increase in revenue from stamps and registration duties.

Such devolution, even in lesser urbanized states, would automatically result in more resources for the GPs. The distribution of these resources should be undertaken in an equitable fashion to ensure that the resources are devolved to the GPs which have displayed an effort in augmenting the collection of OSR and undertook key investments in the creation of capital assets in the GPs. A similar case can be made for the devolution of other tax heads which are collected by the State governments. While a case can be made for the GPs to improve their resource mobilization, it is imperative that the state governments step up their roles to provide the appropriate conditions for the GPs to invest in the infrastructural facilities in their geography. This, in turn, will boost the capacity of the GPs to augment the collection of their own revenues, reducing their dependence on the State and Union governments. Meanwhile, the significant delays in the constitution of new SFCs, especially after the expiry of the previous one, as has also been pointed out by the 15th FC should be reduced.