Why is it in the News?

There is a need to educate elected representatives and the public on the significance and the need for panchayats to be able to survive on its own resources

Context:

• Three decades have passed since the enactment of the 73rd and 74th Constitutional Amendment Acts, designed to institutionalize local bodies as entities of local self-government.
• Presently, the degree of devolution in India's Panchayati Raj institutions exhibits variations among states, with some making substantial strides and others trailing behind.
• Therefore, there is a pressing need to scrutinize the fiscal devolution dimension, underscoring the pivotal role of state government commitment in enhancing the effectiveness of Panchayati Raj institutions at the grassroots level.

What is the Local Self Government?

• The system of local self-government, more commonly known as ‘panchayats’, had been established to empower the grassroots of democracy in India.
• Panchayats or local-self rule is a three-tier system in each state which has elected bodies at the village, taluk and district levels.
• The concept of panchayats has been present in Indian society since ancient times.
• Over the centuries the concept has undergone various changes and modifications and in the recent past has taken the form of panchayati raj institutions after decentralization reforms in the early 1990s.
• These institutions for grassroots-level democracy were formally included in the Constitution through the 73rd and 74th Amendments Act in 1993.
• The constitutional amendments also ensured the reservation of one-third of all elected positions for women in both rural and urban areas.
• Derived from the Central Act, various State Panchayati Raj Acts have incorporated provisions for taxation and revenue collection.
• The main idea of setting up local-self government institutions was to enable and empower the local people to manage their affairs by being a part of the decision-making process and participating in the implementation of policies in a more effective manner.

The Present State of Fiscal Devolution of Panchayats:

• Reliance on External Funds: The 73rd and 74th Constitutional Amendments Acts underscored the importance of fiscal devolution, urging Panchayati Raj institutions and urban local bodies to achieve financial self-sufficiency.
  • These amendments explicitly stated the necessity for local bodies to generate their own revenues to reduce reliance on grants from higher levels of government.
  • However, the current scenario indicates that Panchayati Raj institutions still heavily depend on external funding, with only 1% of their revenue originating from taxes.
• Panchayats' Struggle to Generate Revenue Through Taxation: The data highlights the challenge that, despite constitutional provisions, Panchayats are not effectively utilizing taxation as a primary revenue source.
  • Merely 1% of revenue is generated through taxes, while a significant 80% is sourced from the Central government and 15% from the States.
  • This disparity raises concerns about the commitment of state governments to decentralization and the overall efficacy of devolution initiatives implemented over the past three decades.
• Centralization of Financial Resources Despite Constitutional Emphasis on Fiscal Devolution: Despite the constitutional emphasis on fiscal devolution, the centralization of financial resources remains a persistent issue.
  • Panchayats are envisioned as self-governing entities with the authority to raise their own revenue, yet the reality paints a different picture.
  • The disproportionate distribution of revenue indicates a lack of fiscal empowerment at the grassroots level, undermining the fundamental principles of local self-government.

What are the Challenges Faced by Panchayati Raj Institutions in Revenue Generation?

• Dependency on Grants: The reliance on grants is exacerbated by the heightened allocations from Central Finance Commissions (CFC).
  • A comparative analysis reveals a significant increase in grants disbursed through the 14th and 15th CFCs, amounting to ?2,00,202 crore and ?2,80,733 crore, respectively.
  • This substantial influx of grants has inadvertently diminished incentives for generating own-source revenue.
  • Panchayats, buoyed by augmented financial assistance, have gradually shifted focus away from revenue generation, fostering a culture of dependence on external funds.
• The Culture of Entitlement: A prevalent cultural mindset fosters resistance to taxation, with individuals expecting a range of services and benefits without contributing financially to the sustenance of Panchayats.
  • This aversion to taxation arises from the belief that public services should be provided without imposing a direct financial burden on the local populace.
• Dilemma of Elected Representatives: Elected representatives, crucial to the functioning of Panchayati Raj institutions, grapple with their own set of challenges.
  • There exists a tangible apprehension among these representatives that levying taxes might adversely affect their popularity and electoral prospects.
  • This fear often results in hesitancy to take decisive steps towards revenue generation.
  • Addressing this challenge necessitates targeted efforts to educate elected representatives about the enduring benefits of financial self-sufficiency and its positive impact on local development endeavours.
• Decline in Tax Collection: Tax collection, which stood at ?3,12,075 lakh in 2018-19, dwindled to ?2,71,386 lakh by 2021-2022.
  • This downward trend raises concerns, signalling a waning commitment to financial autonomy at the local level.
  • Similarly, non-tax revenue also experienced a decline from ?2,33,863 lakh to ?2,09,864 lakh during the same period.
  • These patterns underscore the imperative for revitalized efforts in revenue generation and a departure from grant dependency.

Government's Efforts to Implement Constitutionally Mandated Fiscal Devolution:

• Establishment of an Expert Committee: To address this challenge, the Ministry of Panchayati Raj constituted an expert committee tasked with examining the own source of revenue (OSR) of rural local bodies.
  • The committee's findings delineate various revenue-generating avenues accessible to Panchayati Raj institutions through State Acts.
  • These mechanisms include property tax, land revenue cess, stamp duty surcharge, tolls, professional tax, advertisement tax, and user charges for essential services like water, sanitation, and lighting.
  • While these avenues exist, their effective implementation is imperative for Panchayats to attain financial autonomy.
• Focus on Effective Taxation Mechanisms: The report underscores the significance of establishing an enabling environment for taxation, encompassing decisions on tax and non-tax bases, enactment of robust tax management and enforcement laws, etc.
  • This strategic approach aims to empower Panchayats to fully leverage their revenue generation potential.
  • While taxation constitutes a vital aspect of fiscal devolution, the report also acknowledges the potential of non-tax revenue streams, including Fees, rent, income from investment sales and hire charges,
• Along with revenue from innovative initiatives such as rural business hubs, commercial ventures, renewable energy projects, carbon credits, CSR funds, and donations.
• Diversification of revenue sources can bolster the financial resilience of Panchayati Raj institutions, reducing their reliance on grants.

The Role of Gram Sabhas:

• Gram sabhas have a significant role in fostering self-sufficiency and sustainable development at the grass-roots level by leveraging local resources for revenue generation.
• They can be engaged in planning, decision-making, and implementation of revenue-generating initiatives that range from agriculture and tourism to small-scale industries.
• 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.

Way Forward:

• Education and Awareness: There is a pressing need to raise awareness among elected representatives and the public about the importance of revenue generation for developing Panchayats as self-sustaining 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.
  • Achieving this goal requires concerted efforts at all levels of governance, including the state and central levels.
• Promotion of Entrepreneurship: Gram Sabhas plays a crucial role in promoting entrepreneurship and fostering partnerships with external stakeholders to bolster revenue generation efforts.
  • Encouraging entrepreneurial ventures within local communities can stimulate economic growth and reduce dependency on external funding.
• Collaboration and Support: Panchayats need to collaborate closely with higher tiers of governance and external stakeholders to enhance their revenue generation capabilities.
  • This collaborative approach can facilitate the implementation of innovative initiatives and the efficient utilization of resources, thereby fostering financial self-reliance among Panchayats.