Having Panchayats as Self-Governing Institutions

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Why in News?

  • It has been three decades since the implementation of the 73rd and 74th Constitutional Amendments Acts, which aimed to establish local bodies as institutions of local self-government.
  • Today, the status of devolution in India's Panchayati Raj institutions varies across states. While some states have made significant progress, others lag behind.
  • Thus, it is crucial to analyse the fiscal devolution aspect, emphasising the importance of state government commitment in making Panchayati Raj institutions effective at the grassroots level.

The Current State of Fiscal Devolution and Own Source of Revenue

  • Reliance on External Funding
    • The 73rd and 74th Constitutional Amendments Acts emphasised fiscal devolution, urging Panchayati Raj institutions and urban local bodies to be financially self-reliant.
    • These amendments specified the need for local bodies to generate their own revenues to reduce dependency on grants from higher tiers of government.
    • However, the current situation reveals that Panchayati Raj institutions are still heavily reliant on external funding, with only 1% of their revenue derived from taxes.
  • Panchayats Failure to Generate Own Income Through Taxation
    • The data highlights the stark reality that despite the constitutional provisions, Panchayats are not effectively leveraging taxation as a primary source of income.
    • The data indicates that a mere 1% of revenue is earned through taxes, while a substantial 80% comes from the Central government and 15% from the States.
    • This discrepancy raises questions about the commitment of state governments towards decentralisation and the overall success of the devolution initiatives undertaken over the past 30 years.
  • Centralisation of Financial Resources Despite Constitutional Emphasis on Fiscal Devolution
    • Despite the constitutional emphasis on fiscal devolution, the centralisation of financial resources remains a persistent challenge.
    • Panchayats are expected to be self-governing entities with the authority to raise their revenue, but the reality presents a stark contrast.
    • The imbalance in revenue distribution reveals a lack of fiscal empowerment at the grassroots level, undermining the core principles of local self-government.

Government’s Initiatives to Implement Constitutionally Mandated Fiscal Devolution

  • Formulation of an Expert Committee
    • To address this issue, the Ministry of Panchayati Raj established an expert committee to examine the own source of revenue (OSR) of rural local bodies.
    • The committee's report outlines various revenue-generating mechanisms available to Panchayati Raj institutions through State Acts.
    • Some of these mechanisms are property tax, land revenue cess, stamp duty surcharge, tolls, professional tax, advertisement tax, and user charges for essential services such as water, sanitation, and lighting.
    • While these avenues exist, their effective implementation is crucial for Panchayats to become financially independent.
  • Report’s Emphasis on Effective Taxation Mechanism
    • The report further emphasises the importance of establishing a conducive environment for taxation, encompassing decisions on tax and non-tax bases, the enactment of robust tax management and enforcement laws, etc.
    • This strategic approach is aimed at empowering Panchayats to harness their full potential for revenue generation.
    • While taxation is a significant aspect of fiscal devolution, the report also recognises the potential for non-tax revenue. This includes -
      • Fees, rent, income from investment sales and hire charges,
      • As well as income from innovative projects such as rural business hubs, commercial ventures, renewable energy initiatives, carbon credits, CSR funds, and donations.
      • Diversifying revenue sources can enhance the financial resilience of Panchayati Raj institutions, making them less dependent on grants.

Challenges Faced by Panchayati Raj Institutions in Generating Their Own Revenue

  • The Freebie Culture
    • This cultural phenomenon stems an aversion to paying taxes, as individuals expect a range of services and benefits without contributing to the financial sustenance of Panchayats.
    • The resistance to taxation emerges from a perception that public services should be delivered without a direct financial burden on the local population.
  • Elected Representatives' Dilemma: Balancing Popularity and Fiscal Responsibility
    • Elected representatives, who play a pivotal role in the functioning of Panchayati Raj institutions, face their own set of challenges.
    • There is a palpable fear among these representatives that imposing taxes might adversely impact their popularity and electoral prospects.
    • This fear often translates into a reluctance to take bold steps towards revenue generation.
    • Overcoming this challenge requires targeted efforts to educate elected representatives about the long-term benefits of financial self-sufficiency and the positive impact on local development initiatives.
  • Dependency on Grants
    • The dependency on grants is worsened by the increased allocations from Central Finance Commissions (CFC).
    • A comparative analysis reveals a substantial rise in grants allocated through the 14th and 15th CFCs, reaching ₹2,00,202 and ₹2,80,733 crore, respectively.
    • This substantial inflow of grants has inadvertently led to a decline in the efforts to raise own source revenue.
    • Panchayats, sustained by the increased financial support, have gradually shifted their focus away from revenue generation, fostering a culture of dependency on external funds.
  • Decline in Tax Collection
    • While tax collection was ₹3,12,075 lakh in 2018-19, it decreased to ₹2,71,386 lakh in 2021-2022.
    • This decline is worrisome, as it reflects a reduced commitment to financial autonomy at the local level.
    • Non-tax revenue also witnessed a decline from ₹2,33,863 lakh to ₹2,09,864 lakh during the same period.
    • These trends underscore the need for a renewed focus on revenue generation efforts and a shift away from dependency on grants.

Way Forward

  • Enhanced Role of Gram Sabhas
    • Gram Sabhas play a crucial role in fostering self-sufficiency and sustainable development at the grassroots level.
    • They can engage in planning, decision-making, and implementation of revenue-generating initiatives, ensuring transparency and inclusive participation.
    • They have the authority to impose taxes, fees, and levies, directing the funds towards local development projects, public services, and social welfare programmes.
    • Through transparent financial management and inclusive participation, gram sabhas ensure accountability and foster community trust, ultimately empowering villages to become economically independent and resilient.
    • Thus, gram Sabhas need to promote entrepreneurship, and foster partnerships with external stakeholders to enhance the effectiveness of revenue generation efforts
  • Overcoming the Dependency Syndrome
    • To overcome the dependency syndrome and ensure self-sufficiency, there is a need for concerted efforts at all levels of governance.
    • Elected representatives and the public must be educated on the significance of raising revenue for the development of Panchayati Raj institutions.
    • Ultimately, the dependency syndrome for grants has to be minimised and in due course, panchayats will be able to survive on their own resources.


  • The constitutional amendments set forth specific details on fiscal devolution, emphasising the generation of own revenues by Panchayati Raj institutions.
  • Dedicated efforts at the state and central levels are essential for Panchayati Raj institutions to achieve financial independence and truly function as self-governing entities.

Q1) What is the significance of the 73rd Constitutional Amendment?

The 73rd Constitutional Amendment, enacted in 1992, brought about a significant transformation in India's local governance system. It aimed to decentralise power by introducing Panchayati Raj Institutions (PRIs) at the village, intermediate, and district levels. This amendment granted constitutional status to PRIs, empowering them to take charge of local administration, planning, and development. It marked a crucial step towards grassroots democracy, ensuring greater representation and participation of rural communities in decision-making processes.

Q2) How did the 73rd Constitutional Amendment impact women's participation in local governance?

The 73rd Constitutional Amendment played a pivotal role in promoting gender equality in local governance. It mandated the reservation of seats for women in Panchayats, ensuring a minimum of one-third representation. This provision aimed at addressing the historical underrepresentation of women in political spheres. Consequently, it led to a substantial increase in the participation of women in local governance bodies. The amendment not only empowered women at the grassroots level but also contributed to a more inclusive and diverse decision-making process in rural areas.

Source: The Hindu