Fiscal position of PRI-Empowering panchayats: Local bodies need more predictable revenue flows

Source: The post fiscal position of PRI has been created, based on the article “Empowering panchayats: Local bodies need more predictable revenue flows” published in “Business standard” on 29th January 2024.

UPSC Syllabus Topic: GS Paper2- Polity- devolution of powers and finances up to local levels and challenges therein.

News: The article discusses a Reserve Bank of India study on the financial state of local government bodies in India. It highlights their limited financial power and dependence on higher government levels.

What is the current state of local government bodies in India?

Post-independence, the 73rd Amendment in 1992 institutionalized PRIs at three levels.

As of December 2022, India has 255,623 gram panchayats, 6,707 mandal panchayats, and 665 zila parishads.

The Fifteenth Finance Commission suggested ₹2.4 trillion for the period under its review.

What are the major findings by RBI study of the fiscal position of PRI?

The RBI study highlights the limited financial capabilities of Panchayati Raj Institutions (PRIs) in India. PRIs are highly dependent on higher government levels for financial support.

In the fiscal year 2022-23, the average revenue per panchayat was ₹21.23 lakh.

This revenue includes taxes, grants, and other sources.

However, PRIs’ own revenue from local taxes and fees was only 1.1% of their total income.

Revenue expenditure of panchayats is less than 0.6% of the gross state domestic product for all states.

The study underscores the need for more fiscal decentralization to enhance the effectiveness of PRIs.

How can the fiscal position of PRIs be improved?

1. Increase financial autonomy for Panchayati Raj Institutions (PRIs) by enhancing their revenue-generating capabilities.
2. Implement Article 243 (I) effectively, requiring states to establish Finance Commissions for fair revenue sharing with PRIs.
3. Enhance administrative skills at local levels for better financial handling and ensure steady, ample funding for effective planning and program execution.
4. Learn from global examples where local governments manage significant portions of tax revenue, such as over 20% in Finland and Switzerland.
5. Encourage decentralization, empowering local leaders to make decisions based on community-specific needs and circumstances.

Question for practice:

Discuss the key findings of the RBI study on the fiscal position of Panchayati Raj Institutions (PRIs) in India.