1. Introduction

2.1 The Panchayati Raj Institutions (PRIs) are entrusted with planning and implementing various essential services and developmental activities in rural areas. An analysis of their fiscal situation is, however, constrained by the non-availability of consolidated data. This chapter attempts to address this concern by analysing Panchayat finances across 26 States/UTs for 2020-21, 2021-22 and 2022-23. The rest of this chapter is structured into three sections. Section 2 examines fiscal outcomes for the period of reference. Section 3 discusses the financing of Panchayats through grants. Section 4 summarises the key findings.

2. The State of Panchayat Finances

2.2 The Panchayats are constituted in a three-tier structure, i.e., village, intermediate and district level. At the village level, there is a Gram Sabha, consisting of persons registered in the electoral rolls in a village within the Panchayat. The village directly elects the Chairperson of the Panchayat. Currently, there are more than 2.55 lakh village Panchayats in the country (Table II.1).

2.3 In consultation with stakeholders, the Ministry of Panchayati Raj (MoPR) has formulated a simplified format of accounts for PRIs to exercise better accountability and transparency. In this system, the functions of the Panchayats, as enumerated in the 11th Schedule of the Constitution, are represented through a four-digit major code classification (Annex) and a second three-digit minor head classification.

2.4 Panchayats’ information on receipts and payments is provided to the MoPR in this format, and it is accessible to the public through the eGramSwaraj portal. The coverage of the number of village Panchayats reporting the data has improved over time - the number of Panchayats reporting data on the portal during the last three years has averaged 2.43 lakh and 2.36 lakh for revenue receipts and expenditure, respectively, covering more than 90 per cent of total village Panchayats in the country. The number for revenue expenditure is lower due to non-reporting of data by some Panchayats, and the gap has narrowed in recent years. The number of Panchayats reporting data for capital receipts and capital expenditure is less. Hence, the analysis in this Report is mainly restricted to revenue receipts and revenue expenditure. Furthermore, the reporting of data is not consistent across the years, with instances of Panchayats reporting data for only two of the three years or not reporting data for some account heads for all three years. The data were cleaned for such reporting issues, and a balanced panel has been used for the analysis with the same number of village Panchayats across the three years. The data in the balanced panel cover 80.8 per cent and 69.1 per cent of total Panchayats for revenue receipts and expenditure, respectively (Table II.2).

2.5 Depending upon the size and population of the State, the number of Panchayats varies considerably across the States in the dataset. For revenue receipts, the number of Panchayats varies from 102 in Goa to 55,274 in Uttar Pradesh. Furthermore, for a given State, there can be wide variations in the reporting between revenue receipts and revenue expenditure. To address such issues, the analysis and State-wise data presented in this Report pertain to averages per Panchayat level.

2.1 Receipts

2.6 The revenue receipts are dominated by grants-in-aid, with a share of more than 95 per cent of the total receipts (Table II.3). The Panchayats receive grants from both Central and State governments. These grants may be distributed under specific schemes or based on the Central Finance Commission’s (CFC) and State Finance Commissions’ (SFC) recommendations.

2.7 The average revenue per Panchayat from all sources - taxes, non-taxes and grants - was ₹21.2 lakh in 2020-21, ₹23.2 lakh in 2021-22 and ₹21.23 lakh in 2022-23. The decline in 2022-23 was owing to lesser devolution of grants. Aggregate revenue receipts appear to vary broadly in line with the States’ populations (Chart II.1).

2.8 The ratio of revenue receipts of the Panchayats to States’ own revenues ranges from 0.1 per cent in Andhra Pradesh to 2.5 per cent in Uttar Pradesh, indicating that their revenues are moderate relative to those of the States (Chart II.2). The average revenue per Panchayat varied from ₹2.7 lakh in Andhra Pradesh to ₹64 lakh in West Bengal (Chart II.3).

2.9 The own revenues of the Panchayats - generated by imposing local taxes, fees, and charges on various activities, including land revenue, professional and trade taxes, and miscellaneous fees – were only 1.1 per cent of their total revenue during the study period (Table II.4). Non-tax revenue - primarily from Panchayati Raj programmes and interest earnings – is also modest, with a share of only 3.3 per cent of their total revenue receipts. Panchayats in Tamil Nadu, Himachal Pradesh, Maharashtra, and Telangana reported higher non-tax revenue than other States (Chart II.4). Maharashtra’s high own non-tax revenue in 2022-23 is attributed to significant receipts under the Panchayati Raj programmes.

2.2 Expenditure

2.10 The average expenditure per Panchayat decreased from ₹17.3 lakh in 2020-21 to ₹12.5 lakh in 2022-23 (Table II.5) due to higher-than-normal spending in the pandemic year 2020-21. Goa, Karnataka, Odisha, Sikkim, Kerala, and Tamil Nadu recorded the highest average expenditure at the Panchayat level (Chart II.5 and Chart II.6).

2.11 The ratio of revenue expenditure of Panchayats to nominal GSDP is less than 0.6 per cent for all the States, ranging from 0.001 per cent in Bihar to 0.56 per cent in Odisha (Chart II.7).

2.12 Regarding the composition of expenditure, there has been a consistent rise in spending on water and sanitation during the sample period, mirroring an increased emphasis on cleanliness and access to clean water supply; however, there exist inter-State differences (Chart II.8).

2.13 Investment in capital projects constituted 29.6 per cent of the total expenditure of Panchayats in 2022-23, on average, across States (Chart II.9).

2.14 A significant share of the capital expenditure by PRIs is allocated to Panchayati Raj Programmes, transportation, water supply and sanitation, rural electrification, and rural housing (Chart II.10).

2.15 The revenue to capital expenditure ratio averaged 3.2 in 2022-23, and the ratio varied between 0.1 in Bihar and 11.5 in Tripura (Chart II.11).

3. Grants

2.16 Grants from higher tiers of the government are an overwhelming funding source for the PRIs, empowering them to fulfil their mandated responsibilities and promote development at the grassroots level. Grants are disbursed by the Central Government, based on the recommendations of the Central Finance Commissions (Box II.1) and by the State Governments, based on the recommendations of the State Finance Commissions (Box II.2). They are also allocated through centrally sponsored schemes. The grants come in various forms:

Box II.2: State Finance Commission Grants to Local Bodies Article 243-I of the Indian Constitution stipulates the establishment of State Finance Commissions (SFCs) for recommending tax sharing between the State and the Panchayats. The initial SFC was to be constituted within one year of the enactment of the Constitution (73rd Amendment) Act in 1992. Subsequently, new SFCs were to be formed every five years. While the setting up of the sixth SFC was scheduled for all the States in 2019-20, its constitution has not been uniform and timely across States (Chart II.2.1). As per the Fifteenth CFC Report, only 4 States, namely Assam, Bihar, Punjab and Rajasthan, had established their 6th SFCs, and another 11 States had constituted their 5th SFC till then. According to MoPR, only 9 States have constituted their 6th SFC by 2022. Keeping in view the importance of SFC grants for the local bodies, the Fifteenth CFC recommended that the compliance to constitutional provisions in respect of SFC will be a necessary condition for disbursement of grants to local bodies for 2024-25 and 2025-26. The composition of the divisible pool of resources for determining the vertical devolution of funds between the State and the local governments has varied across States and Commissions. Some SFCs have recommended grants as a portion of own tax revenues of the State, while others have devolved a share of own revenues (i.e., own tax and own non-tax revenues) to the local bodies. Additionally, some SFCs have recommended devolution based on the State’s total revenue, including the State’s share in Central transfers. The average annual per capita SFC grants for all the States taken together increased from ₹599 during 2010-14 to ₹1,180 during 2015-19. Bihar, Sikkim, Haryana, Assam, Kerala, Uttarakhand, and Himachal Pradesh accounted for the highest increase in SFC grants (Table II.2.1). For the 2015-19 period, Odisha, West Bengal and Mizoram had the lowest average annual per capita SFC devolutions while they were above the national average for Kerala and Karnataka (Chart II.2.2). States define the composition of SFC grants differently, and some States include Central transfers in their grants. While SFC grants have co-moved with CFC grants (Chart II.2.3), the per capita grants recommended by the SFCs, averaged over the 22 States mentioned in Table II.2.1 have been consistently higher than the grants recommended by the CFCs (Chart II.2.4). Although CFC grants increased from 14.3 per cent of the SFC grants (of selected States) in 2010-11 to 44.2 per cent in 2019-20, SFC grants remain a vital source of funds for the local bodies. Table II.2.1: Average Annual Per Capita SFC Grants (in ₹) State 2010-14 2015-19 Per cent change Odisha 209.4 146.7 -29.9 West Bengal 111.5 152.3 36.5 Uttar Pradesh 315.5 449.5 42.4 Manipur 697.0 1,002.7 43.8 Tamil Nadu 902.5 1,426.2 58.0 Punjab 287.6 456.5 58.7 Rajasthan 291.6 471.9 61.7 Chhattisgarh 307.3 504.0 63.9 Karnataka 3,212.2 6,090.0 89.5 Himachal Pradesh 182.3 367.1 101.3 Uttarakhand 644.7 1,361.2 111.1 Kerala 1,405.4 2,999.7 113.4 Assam 168.2 431.0 156.2 Haryana 250.4 737.8 194.6 Sikkim 47.5 212.4 347.2 Bihar 61.6 356.7 478.5 Andhra Pradesh 421.4 NA - Gujarat 433.5 NA - Madhya Pradesh NA 421.5 - Maharashtra 1,087.9 NA - Mizoram NA 149.1 - Tripura 152.6 NA - All States Average 599.0 1,179.6 96.9 Source: NIPFP, 2018. Apart from the assignment of State taxes to local bodies, there has been a wide variety of grants recommended by the SFCs. They include grants for the maintenance of assets (recommended by the SFCs of Andhra Pradesh, Gujarat, Madhya Pradesh, Odisha, and Tamil Nadu). Some SFCs like in Assam, Chhattisgarh, Haryana and Gujarat have recommended lump sum grants, ad hoc grants, specific needs grants, one-time grants, and special purpose grants. SFCs in Karnataka and Rajasthan recommended untied grants. Performance grants were recommended by the SFCs of Chhattisgarh, Karnataka, Maharashtra, Odisha, Punjab, Rajasthan, and West Bengal in order to incentivise revenue collection by the local bodies. References: Chakraborty, P., Gupta, M., & Singh, R. K. (2018), Overview of State Finance Commission Reports, National Institute of Public Finance and Policy, New Delhi. 15th Central Finance Commission Report, 2020.

• Untied Grants: also known as general-purpose grants, these are provided without specific conditions or restrictions and they can be utilised by PRIs on the basis of local priorities and needs.

• Tied Grants: earmarked for specific purposes or sectors, such as sanitation, education, healthcare, or infrastructure development, these grants ensure that funds are directed towards the targeted areas of development as determined by higher levels of government.

• Performance-based Grants: based on the recommendations of some CFCs to link grants to specific performance criteria, PRIs that demonstrate effective governance, financial management, and successful implementation of development projects may receive additional funds as incentives for their performance.

• Special Category Grants: these grants are designed to address unique challenges or particular needs of PRIs in specific regions or contexts and provide additional financial support to regions facing particular socio-economic or geographical constraints.

2.17 At the Panchayat level, grants are the principal revenue source, with a share of over 95 per cent on average across States (Chart II.12). This is in contrast with the composition of States’ revenue receipts - own tax and non-tax revenue comprise more than 50 per cent of the total revenue receipts for most States (Chart II.13). In a few States such as Andhra Pradesh, Haryana, Himachal Pradesh, Maharashtra, Tamil Nadu, and Telangana, Panchayats have managed to generate relatively higher own revenues. The grants help to reduce horizontal disparities among the Panchayats (Box II.3).

Box II.3: Grants-in-Aid and Horizontal Disparities There are notable differences in the distribution of grants-in-aid to PRIs across States and years (Charts II.3.1a and 1b). The intra-State disparity in the distribution of grants-in-aid is low in Kerala and West Bengal and high in Andhra Pradesh, Haryana, and Jammu and Kashmir. To assess the relationship between grants and horizontal disparities, the deviations of each Panchayat’s revenue (excluding grants) from the respective State-wise mean revenues (excluding grants) are divided into negative and positive deviations. A fixed effects regression is then estimated on grants-in-aid received by the PRI to the ‘deviation from mean’ variable as defined above. The regression results indicate that the Panchayats with lower own revenues than the mean revenue (i.e., Deviation<0) get more grants, on average. On the other hand, no significant association is found between the deviation from mean revenue and grants-in-aid if the revenues are higher than the mean revenue. These results suggest that grants-in-aid mitigate horizontal disparities among the Panchayats (Table II.3.1). Table II.3.1: Grants-in-Aid and Panchayat Revenues   Grants Grants   Deviation<0 Deviation>0 Deviation from Mean 0.632*** 0.0349   (3.820) (0.820) Deviation Squared -0.000*** 0.000   (-7.08) (0.540) Constant 1811027.1*** 2792390.5***   (62.84) (111.13) N 36798 16605 adj. R-sq 0.628 0.899 Source: RBI staff estimates.

4. Conclusion

2.18 An analysis of the financial situation of Panchayats for the period 2020-21 to 2022-23 reveals that nearly all of their revenues are through grants from higher levels of government, underscoring their heavy reliance on the Central and State governments for financial resources. On the expenditure side, there is a discernible upward shift in investment in water supply and sanitation, with the most allocations to the Panchayati Raj Programme. It would be prudent for the Panchayats to reduce their heavy dependence on grants by deploying the tax and non-tax instruments available to them to raise resources. This would help them to improve the quality of their services in rural areas and strengthen the rural economy.

Annex

Data and Methodology

In the streamlined classification system under the Model Accounting System, the initial four-digit categorisation pertains to the primary category denoting functions outlined in the 11th Schedule of the Constitution. The subsequent three-digit classification designates the sub-category indicative of the program or unit of expenditure. All the 29 functions listed in the Eleventh Schedule of the Constitution are subsumed under 23 distinct major heads.

Data Collection

To ensure consistency and uniformity in the dataset, a structured data template was designed, based on the codified accounting structure for Panchayats (Table A.1). This template encompassed both Major and Minor Account Codes, effectively encapsulating the full breadth of financial transactions. The template was shared with the MoPR, and the data received (Table A.2) were subjected to consistency checks to arrive at a balanced panel.