Finances and Functional Challenges of Panchayati Raj Institutions
🧭 Context – Why PRI Finances Matter
When the 73rd Amendment (1992) was passed, it created a strong political and structural framework for Panchayati Raj — with constitutional status, elections, reservation, and powers.
But — can’t we say:
“An institution’s real strength is not in structure, but in substance.”
In this case, substance = financial autonomy.
Without adequate funds, even constitutionally empowered bodies can remain symbolic rather than functional.
Hence, the financial health of PRIs is the real test of grassroots governance.
📊 Sources of Revenue of Panchayats
(As summarised by the Second Administrative Reforms Commission, 2005–2009)
Panchayats receive funds from five major sources:
| Source | Constitutional Basis | Description |
|---|---|---|
| 1. Grants from Union Government | Article 280 | Based on recommendations of the Central Finance Commission to augment state funds for PRIs. |
| 2. Devolution from State Government | Article 243-I | Based on recommendations of the State Finance Commission (SFC) which determines sharing of state taxes. |
| 3. Loans or Grants from the State Government | — | Ad hoc or program-based funding by states. |
| 4. Programme-Specific Allocations | — | Funds under Centrally Sponsored Schemes (CSS) and Additional Central Assistance (like MGNREGA, PMAY, etc.). |
| 5. Internal Resource Generation | — | Panchayat’s own revenue through taxes, duties, tolls, fees, and non-tax sources. |
⚖️ Analysis of PRI Finances (Findings of ARC)
Even after three decades of constitutionalisation, PRIs remain financially weak and dependent.
Let’s look at the ARC’s key conclusions 👇
1️⃣ Weak Internal Resource Generation
- Panchayats’ ability to generate their own income is very limited.
- Reasons:
- Narrow tax base.
- Reluctance of Panchayats to collect taxes — because local leaders find it socially awkward to tax their neighbours.
2️⃣ Dependence on Grants
- Most Panchayats rely heavily on Union and State government grants.
- Even in progressive states like Kerala, Karnataka, and Tamil Nadu, dependence on higher-level funding remains overwhelming.
3️⃣ Tied Funds and Lack of Flexibility
- Majority of grants are scheme-specific (like for MGNREGA, PMGSY, or NRLM).
- Panchayats have little discretion to prioritise local needs.
→ For instance, a village may need drinking water facilities, but funds may come only for toilets or roads.
4️⃣ State Governments’ Fiscal Reluctance
- Due to their own financial stress, states are often unwilling to devolve adequate funds to PRIs, despite constitutional obligation.
5️⃣ State Control Over Key Sectors
- In most 11th Schedule subjects (like education, health, water, irrigation),
the state government directly runs programmes and controls expenditure. - Panchayats are often just implementing agencies with little decision-making power.
6️⃣ Responsibility Without Resources
This has created a classic paradox:
Panchayats have responsibility without resources.
They are expected to plan and deliver development, but lack the financial means and human capacity to do so.
💡 Importance of Local Resource Mobilisation
The ARC highlights that local taxation is not just about revenue — it’s about accountability.
When people pay taxes locally, they demand:
- Transparency in spending, and
- Efficiency from their representatives.
So, taxation = empowerment of citizens + accountability of Panchayats.
In other words: “No taxation without representation” becomes “No representation without taxation.”
📌 Structure of Revenue Sources Among Tiers
The three tiers of Panchayati Raj have different levels of financial power:
| Tier | Financial Base | Remarks |
|---|---|---|
| Gram Panchayat | Strongest | Has authority to levy local taxes (like property tax, market fees, water rates). |
| Block Panchayat (Intermediate) | Moderate | Limited to fees, tolls, and service charges. |
| Zila Parishad (District) | Weak | Depends mostly on grants and administrative revenues. |
So, the village-level Panchayats are relatively better placed for internal resource mobilisation.
🧾 Taxation Powers of Village Panchayats
According to various State Panchayati Raj Acts, Gram Panchayats can levy taxes such as:
- Property / House Tax
- Profession or Trade Tax
- Land Tax / Cess
- Vehicle Tax / Toll
- Entertainment Tax / Fee
- License Fee (for shops, fairs, or markets)
- Non-agricultural land tax
- Fee on registration of cattle
- Water and lighting tax
- Sanitation / Drainage / Conservancy tax
- Education cess
- Tax on fairs and festivals
👉 But in practice, most Panchayats collect very little — either due to reluctance or lack of administrative machinery.
🚫 Reasons for Ineffective Performance of PRIs
Despite constitutional status and 30+ years of existence, PRIs have not performed up to expectations.
Let’s analyse the major causes one by one 👇
1️⃣ Lack of Adequate Devolution of 3Fs (Functions, Funds, Functionaries)
- Most states have not truly devolved powers and staff to PRIs.
- Functions exist on paper; funds and functionaries remain under state control.
- State Finance Commissions (SFCs) often submit reports, but few states implement them seriously.
Hence, PRIs are “constitutional bodies without constitutional strength.”
2️⃣ Excessive Bureaucratic Control
- In many states, bureaucrats dominate development planning.
- Sarpanches must depend on Block officers for fund release and technical approvals.
- This subordinates elected leaders to appointed officials.
3️⃣ Tied Nature of Funds
- Central and State schemes are rigid and uniform — not suited to local realities.
- This leads to wastage or underspending, and discourages local innovation.
4️⃣ Over-Dependence on Government Funding
- Since most resources come from above, PRIs have little ownership.
- Citizens also feel less connected — “Why should we audit or question when it’s not our money?”
This weakens the culture of social accountability.
5️⃣ Reluctance to Use Fiscal Powers
- Gram Panchayats often avoid levying taxes, citing social pressure —
“How can we tax our own people?” - But without local taxation, Panchayats remain financially crippled.
6️⃣ Weak Gram Sabhas
- The Gram Sabha was meant to be a powerful platform for direct democracy.
- But in many states, its powers are poorly defined, meetings are infrequent, and participation is minimal.
This reduces transparency and public involvement.
7️⃣ Creation of Parallel Bodies
- Often, missions and committees (like SHGs, watershed committees, or special-purpose vehicles) are created for “speedy implementation.”
- But they bypass PRIs, duplicating structures and confusing accountability.
- These parallel bodies also tend to corner resources, leaving Panchayats disempowered.
8️⃣ Poor Infrastructure and Human Resource Base
- Many Gram Panchayats lack:
- Full-time secretaries,
- Proper office buildings,
- Basic data systems.
- Many elected representatives are semi-literate, lack training, and don’t fully understand their roles and procedures.
Thus, capacity constraints remain a key bottleneck.
🧠 Conceptual Summary
“The 73rd Amendment gave Panchayats constitutional power,
but not financial power.”
In essence:
| Dimension | Strength | Weakness |
|---|---|---|
| Political | Democratic structure, elections, representation | Stable and institutionalised |
| Administrative | Devolution of functions (partial) | Bureaucratic dominance |
| Financial | Constitutional backing (SFCs, taxes) | Weak implementation, dependency |
| Social | Inclusion of women, SC/STs | Gram Sabha remains underused |
So, what India has today is “decentralisation without fiscal federalism” at the village level.
Until funds follow functions, Panchayati Raj will remain a car without fuel.
💡 Way Forward (Analytical Insight for UPSC Mains)
- Strengthen State Finance Commissions — with binding recommendations.
- Empower Gram Sabhas for social audit and budget approval.
- Encourage local taxation and reward performing Panchayats.
- Reduce bureaucratic control and build Panchayat capacity.
- Merge parallel bodies with PRIs to ensure institutional coherence.
🪶 Final Thought
“The Panchayati Raj system succeeded politically,
but struggles financially and administratively.”
Until decentralisation of power is matched by decentralisation of purse and personnel,
Mahatma Gandhi’s dream of Gram Swaraj — true village self-rule — will remain incomplete.