The Financial Fabric of Rural India: From Disparity to Empowerment

- Akshay Fadnis & Paras Jasrai

The budget season is on in India. As always there is a lot of media attention over the union budget with little attention paid to the state budgets, but there is barely any coverage regarding the state of finances of the Village Panchayats. Quite likely, one of the major reasons is the lack of data regarding the Rural Local Bodies of the country. 

Aisa Pehli Baar Hua 17/18 Saalon Me…

To fill this void, RBI has recently published the “Finances of Panchayati Raj Institutions” thereby expanding the universe of public finance statistics at the granular level (a report on Urban Local Bodies was released in 2022). It is a first-of-its-kind comprehensive report on the state of finances of “Panchayats” since Independence.

The report paints a grim image of the finances of village panchayats with nearly 94% of its revenues emanating from the union and state governments in the form of grants. The essence of decentralization by meeting the governance demands at the grassroots level can only be met properly if the panchayats can find new ways to generate their revenues. This is vital in India’s quest to be a Developed Nation by 2047 as a larger chunk of our population resides in the rural areas. 

Current State of Finances:

The 73rd and 74th amendments to the Constitution of India brought into effect the “Panchayat Raj Institutions (PRI)”, which made the Village Panchayats a constitutional institution with an elected body. This, however, brought in the problem of financing the PRIs. The state finance commissions were set up (along with the expansion of terms for transfers to PRIs by the central finance commissions) which would evaluate and provide the funds needed for the running of the PRIs. 

As of 31 December 2022, there are 2,55,623 village panchayats in the country, however, due to widespread data unavailability, the RBI report covers the finances of nearly 2 lakh panchayats. The report presents the receipts and expenditure profile of such panchayats across various states.

Figure 1: Snapshot of Panchayat Revenues

As you can see in the above table, the own tax and non-tax revenues form a paltry share of the overall revenue pie of the panchayats. A glance at the data suggests that the tax revenues have declined in FY23, while there has been some increase in own-non-tax revenues. Along with this, they do receive grants in aid from the state and central government. The grants in aid coming from the central and state governments also witnessed a decline in FY23 at a time when both the upper tiers of government recorded an increase in their respective revenues (10% and 21%) in FY23. 

Digging Deeper…

A closer look reveals a sobering fiscal position of the village panchayats. At an aggregate level, grants in aid from the state government stood at a meagre 0.22% as of the state’s overall revenue receipts in FY23. This was lower than 0.27% in FY22. In other words, out of every 100 rupees that the states in aggregate collect as revenues, all of the panchayats put together received just 22 paise in FY23. The state-wise situation of the funds disbursal is not that encouraging either (see Figure 2). Barring Himachal Pradesh, all the other states for which data was available witnessed a decline in FY23 compared to FY22. The decline was much sharper in states such as Telangana, Sikkim, and Odisha where the ratio stood at 0.58%, 0.41%, and 0.41% in FY23 from 1.04%, 0.66%, and 0.62% respectively in FY22. The increase in the ratio in HP to 0.75% in FY23 from 0.73% is even more noteworthy considering the state’s weak fiscal position.

Figure 2: Grants from State Government

The grants in aid received by the panchayats from the central government formed 1.0% of the centre’s overall revenue receipts in FY23, down from 1.2% in FY22. This effectively means that out of every 100 rupees that the centre collects, panchayats received one rupee in FY23. Here again, the disbursal of funds at the state level remains similar with 22 out of the 26 state/UTs for which data was available witnessing a fall in the ratio in FY23 from FY22 (see Figure 3). The four states which registered an increase were Gujarat, Karnataka, Jharkhand, and Manipur.  

Figure 3: Grants from the Central Government

Undoubtedly, there has been an increase in grants in aid over the years, however, the above analysis indicates that the proportion of funds allocated trails the revenue pool of the centre and the states. The states’ and centres’ fiscal position and the demand for funds from a plethora of areas have been one of the reasons for lower transfers in the past couple of years. In addition, the high dependency on the upper tier of government for revenues could also lead to delays in expenditure on priority areas such as health, education, etc., (due to the timeliness releasing of funds). Furthermore, grants from the central governments are based on meeting the performance targets for specific heads. A fall in the grants provided indicates poor performances by the PRIs as well.  Thus, the PRIs must endeavour to build their revenues. Generating their revenue would allow them to improve their performance levels in the required areas, which could increase the grants from the finance commissions, setting off a virtuous cycle.

Strategies for Own Revenue Generation:

Article 243-H of the Indian constitution provides the PRIs the right to levy and collect taxes, duties, fees, and fines to generate revenue for its operations. There are few successful cases where the Gram Panchayats have been able to make use of this right appropriately to increase their revenues. 

One such model village is Velpur Gram Panchayat (GP), in Telangana, which received the Panchayat Sashaktikaran Puraskar in 2017 from the Ministry of Panchayati Raj. Apart from the regular income from the taxes collected, the Velpur GP was able to generate its revenue by using the received grants to create assets such as commercial buildings and marketplaces. The commercial buildings had shops where monthly rent of INR1000-1500 was charged depending on the size of the building. Also, the marketplace management was annually auctioned to bidders which was added to the panchayat’s kitty. It was auctioned at INR80,000 for the year 2019. To provide drinking water to the houses, a connection fee and monthly water supply service charge were also collected. Another way to generate more revenue was by leveraging their natural assets to their advantage. The five water bodies under the jurisdiction of the GP are auctioned individually every year for their fishing rights. The village panchayat links the issuing of important documents such as birth certificates, death certificates, etc., to the payments of taxes and fees, to encourage timely payments. 

Along with the Velpur model case, the PRIs located in tourist locations can leverage the natural assets available by levying fees to access the hotspots like viewpoints, waterfalls, etc, and user charges in hotels, when the tourists stay more than a day. The most straightforward way for PRI to generate revenue is by levying and collecting property taxes. PPP can be leveraged to create recreation activities in villages where tourism is possible. It can also come in handy to lease out large unused parcels of land to create solar/wind energy fields. Contracts can be created such that a certain portion of the energy generated can be utilized to power the villages themselves. Moreover, there is now a new avenue of rural agri tourism, whereby the urban populace would experience rural life. This has been a unique and positive experience for the people who have tried it. This experience can not only provide revenue for the village but also enhance the image of the village's way of life. 

To Sum Up…

The RBI report on Panchayat finances serves as a critical analysis, shedding light on their precarious financial situation and sparking renewed discussions on the significance of this foundational tier of government. Despite the 73rd Amendment's intention for State Finance Commissions (SFCs) to be established promptly, progress has been inconsistent across states. As key entities for tax-sharing between states and panchayats, SFCs play a pivotal role. Grants in aid are essential for addressing the disparities within panchayats. Prompt establishment of SFCs could bridge inequalities and empower panchayats to generate their own revenue through asset creation. There are a lot of ways as discussed above to garner more revenues for the panchayats to be “atmanirbhar” which would also help them in spending more on their respective priority areas than hereto. 

“Independence must begin at the bottom”, Gandhi famously said. While a lot has been achieved, much more needs to be accomplished to truly realize his vision of Gram Swaraj.