FINANCES OF PANCHAYATI RAJ INSTITUTIONS (PRIs)

Why in the news?

Recently, the Reserve Bank of India (RBI) released its report titled “Finances of Panchayati Raj Institutions”. The report discusses the fiscal position of PRIs for the years 2020-21 to 2022-23. 

About Panchayati Raj Institutions and their finances

• 73^rd Constitutional Amendment Act 1992: institutionalised the PRIs at three levels i.e.,
  • Mandate for setting up of Panchayats is provided by Article 243 in Part IX of the Constitution of India.
  • Panchayats, being Local Government, is a State subject.
• Number of PRIs: There are a total of 2.62 lakh PRIs in India, with 2.55 lakh Gram Panchayats, 6,707 Mandal Panchayats and 665 Zila Parishads as of October 2023.
• Constitutional Provisions for Financial Empowerment of Panchayats
  • Article 243H: Provides for finance for the Panchayats by securing authorization from State Legislatures for grants-in-aid to the Panchayats from the Consolidated Fund of the State.
    • It empowers panchayats to impose, collect, and allocate taxes, duties, tolls, and fees. 
  • Article 243-I: Setting up a Finance Commission (FC) every 5 years to review the financial position of Panchayats and make recommendations to improve their financial position.
  • Article 280(3)(bb): Mandates FCs to recommend measures needed to augment the Consolidated fund of the state and supplement panchayat resources to the President.

Challenges associated with the finance of PRIs 

• Structural challenges: Inadequate financial resources, heavy reliance on grants from upper tiers of government; and weak infrastructure impede the functioning of PRIs.
  • Around 95 % of their revenues come from grants by higher levels of government.
• Inconsistency in data: Assessment of the fiscal health of PRIs is difficult due to a lack of data on their revenues and expenditures and a lack of skilled staff to maintain data in standardised formats. 
  • Audit reports have been generated for only 46% of Gram Panchayats for 2019-20.
• Tax revenue: Sources of revenue for PRIs are limited, mainly property taxes, fees, and fines. 
  • They face challenges in raising tax revenue due to a limited tax base, shortage of staff and adequate infrastructure along with a lack of clear guidelines for introducing new taxes.
• Corruption: Instances of misuse of funds for personal gain have hindered the ability of PRIs to effectively carry out their roles and responsibilities.
  • For example, Rs 1.58 crore was diverted from the gram panchayat account without prior permission from the panchayat body and higher officials in Vijayawada.
• State Finance Commissions (SFC): As per rural development and Panchayati raj report, only 9 states have been constituting SFCs regularly, and out of them, only two are active.

Way forward

• Budgetary support: Increase budgetary allocations from higher levels of government to ensure PRIs have sufficient resources to fulfil their responsibilities. Also, steps should be taken to diverse funding sources of the PRIs.
• Skilling: Training and capacity-building of PRI members to enhance their financial management skills, ensuring effective and transparent handling of funds.
• Accountability: Enforce strict financial accountability measures, regular and independent audits, and transparent reporting mechanisms to prevent misuse of funds and corruption.
• Strengthening SFC: SFCs should be constituted timely every 5 years and reports should be tabled in state legislatures regularly. It can fortify the financial position of PRIs and help them in better delivery of their responsibilities.
• Awareness: Raise citizen’s awareness about the functions and significance of PRIs by encouraging their increased participation in local governance processes.