Author
Amar Nath H.K.
Aakanksha Shrawan
National Institute of Public Finance and Policy
An Autonomous Institute under Ministry Of Finance
The 73rd Constitutional Amendment Act 1992, bestowed constitutional status to Panchayati Raj Institutions (PRIs) by giving a practical shape to Article 40. The objective was to create legal conditions of local self-rule by democratically decentralising 3Fs—Funds, Functions, and Functionaries. The three-tier Panchayati Raj system constitutes Panchayats at the village level, Panchayat Samiti/Block Panchayat/Janpad Panchayat at the intermediate level, and Zilla Parishad at the district level, each playing distinct roles in local administration and development. This governance system was introduced to strengthen democracy at the grassroots level by devolving powers and responsibilities to elected representatives in rural areas. The Gram Panchayat was given a significant role in the decision-making process and its social and economic development. Gram Panchayat is the cornerstone of the Panchayati Raj system. This made it obligatory for states to constitute three-tier PRIs and conduct regular elections. It brought democracy to the doorsteps of rural India. It aimed to create a new set of relationships between the citizens and the State to transform representative democracy into participative democracy. The Gram Panchayat forms the base of the three-tier system of PRIs and holds a prime position in local-level decision-making and development. Gram Panchayats have been accorded maximum powers among all other tiers of Panchayati Raj in regard to taxation and development expenditure, given their proximity to the citizens of the Panchayat.
Rao et al. (2008) state that local bodies have the capacity to provide quasi-public goods more efficiently than higher levels of government because they are well-informed about the preferences of the people. They can target service delivery that may ensure equitable distribution of benefits. The Gram Panchayats receive devolved resources from the Centre and the respective State in the form of grants-in-aid or statutory grants and funds for specific schemes. Gram Panchayats also raise their own source revenue or OSR, from resources within their jurisdiction. This political and financial power given by the Constitution supports the decentralisation of governance.
India has more than 2,55,623 Gram Panchayats, 6,697 Intermediate Panchayats, and 665 District Panchayats. There is little scope for Intermediate and District Panchayats to raise revenue. It is only the Gram Panchayats who have enough tax and non-tax handles that can be imposed legally with the approval of the Gram Sabha. The following table lists some of the sources of own revenue at the Gram Panchayat level.
| Tax Revenue | Non-Tax Revenue | Miscellaneous Sources of Fund |
|---|---|---|
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Source: NCAER (2022)
Historical Background of Own Source Revenue
The advisory of the MoPR on the subject ‘Making Gram Sabha Vibrant’ (MoPR, 2024) contains several suggestions, prominent amongst them being the restructuring of the frequency and methodology of conduct of the Gram Sabha meetings, participation of district/block administration officials in the Gram Sabha meetings, awareness creation measures to ensure enhanced participation of eligible citizens in Gram Sabha, and the support systems to be developed in terms of strengthening the sub-committees of the Gram Panchayats. In addition, Gram Panchayats have increasingly taken on significant roles, such as providing essential services like water and sanitation to their residents. Recently, Gram Panchayats played an imperative role in managing the havoc wreaked by the COVID-19 pandemic in rural areas, which led to a surge in public expectations from these local bodies.
While Panchayats receive grants based on the recommendations of the Central and State Finance Commissions and for various other purposes, they often fall short of meeting their full potential and public expectations due to insufficient financial resources. To enhance the fiscal autonomy of PRIs, it is crucial to boost their own source revenues.
The concept of “own source revenue” pertains to the income generated by a government or a public entity from its internal resources, as opposed to transfers from other levels of government, grants, or loans. The Gram Panchayats can generate own source revenues either in the form of taxes or user charges. While taxes can include taxes on land and buildings, profession tax, entertainment tax, etc., user charges include fees and fines, rents and royalties, water connection charges, and auction income. It is crucial to augment the own source revenue of the Gram Panchayats in order to attain financial autonomy at the third tier so as to provide independence in determination of the budgeting and development process. A higher magnitude of the own source revenue of the Gram Panchayats will also reduce their dependence on the finances of the Central and State governments, thus reducing their fiscal stress in times of need. This could lead to the reduced occurrence of the flypaper effect, which results when a dollar of exogenous grant-in-aid results in greater public spending than an equivalent dollar of citizen income (Inman, 2009). Thus, with greater own source revenue and reduced financial aid from the Centre and the State, there would be frugal public spending on the part of the Gram Panchayat.
Central and State Finance Commissions also play a pivotal role in strengthening the financial positions of the local bodies. It is through their recommendations and suggestions that the Gram Panchayats are encouraged to augment their own source revenues. However, at present, most of the Gram Panchayats collect meagre own source revenue. The collection of property tax, which is the source of the highest collection of own source revenue in the majority of Gram Panchayats, is still below potential. One of the major reasons that limits the optimal collection of own source revenue by the Gram Panchayats is the absence of appropriate fiscal powers assigned to the Gram Panchayats, which, if assigned, are further sometimes limited by the State’s laws and regulations. Additionally, most Gram Panchayats are not able to exercise their financial powers fully because of capacity constraints and state-specific differences in rules and regulations.
The existing research on PRIs in India explores the challenges and opportunities related to enhancing their financial autonomy, particularly through their own source revenue. Various reports and studies provide valuable insights and policy recommendations for strengthening fiscal decentralisation and enabling PRIs to fulfill their constitutional roles effectively.
MoPR (2024) underscores a fundamental issue. Own source revenue forms a mere 6-7% of Panchayat finances across most states, with the notable exceptions of Kerala, Karnataka, and Goa. It attributes this to systemic over-reliance on grants from Central and State Finance Commissions, which, while essential for mitigating fiscal disparities, undermine local self-reliance. Gram Panchayats, the lowest tier of PRIs, contribute over 78% of OSR generation, yet they remain constrained by limited tax enforcement, inadequate administrative capacity, and a lack of community awareness about the developmental benefits of OSR. The report illustrates these challenges with examples. For instance, while Dharmaj Gram Panchayat in Gujarat successfully mobilized INR 3 crore through its own source revenue, other regions demonstrated minimal initiative due to political sensitivities and fear of alienating voters. Untapped potential lies in areas like property taxes and common property resources (CPRs), including fisheries and grazing lands, which are underutilized in most states. The recommendations include leveraging SVAMITVA (Survey of Villages and Mapping with Improvised Technology in Village Areas) data for property tax assessments, digitizing collection processes, and incentivizing Panchayats with matching grants tied to performance. These measures could bridge the gap between actual and potential revenue, enabling PRIs to align local spending with community needs effectively.
The analysis by NCAER (2022) adds empirical depth by analysing own source revenue trends across 23 states. It identifies significant regional disparities: Southern states like Kerala and Maharashtra lead in both total and per capita own source revenue collection, leveraging strong administrative frameworks and public participation. On the other hand, Bihar, Uttar Pradesh, and Odisha lag far behind, constrained by socio-political factors, limited tax enforcement, and inadequate awareness campaigns. The study finds that property tax, water tax, and license fees dominate own source revenue streams, while CPRs remain largely untapped, with only 18% of Gram Panchayats utilizing these resources. Even when CPRs are exploited, the scope is narrow, as seen in Odisha, where fisheries and ponds account for over 32% of revenue generation, yet other CPRs remain neglected. The Report highlights that 75% of Gram Panchayat officials cite villagers’ reluctance to pay taxes as a significant barrier, compounded by poor fiscal autonomy and unclear directives. Political considerations also discourage Panchayats from revising tax rates or enforcing collections rigorously. The Report recommends standardizing tax rates across states, introducing digital tools like asset registries for transparency, and fostering community awareness about the importance of own source revenues. The Report also suggests greater involvement of State Finance Commissions to ensure equitable fiscal devolution and incentivize Panchayats to adopt best practices.
The recent study by the Reserve Bank of India (RBI) (2024) situates PRIs’ financial constraints within a broader fiscal policy framework. It highlights that their heavy dependence on grants not only limits financial self-reliance but also restricts their ability to prioritize local developmental needs. The report emphasizes the critical role of SFCs in rectifying these imbalances by ensuring timely recommendations and equitable fund allocation. Yet, delays in establishing and operationalizing SFCs remain a persistent issue. The report further underscores the need for fiscal discipline, transparent budgeting, and robust monitoring mechanisms to optimize resource utilization. The lack of standardized financial data is a recurring challenge, hampering the evaluation of PRIs’ fiscal performance. Additionally, the RBI identifies PRIs as pivotal players in climate resilience. Their proximity to communities and understanding of local environmental dynamics position them to promote sustainable farming practices, renewable energy adoption, and climate-smart infrastructure development. Linking grants to climate resilience measures could incentivize PRIs to integrate environmental concerns into their governance framework.
Adding historical depth, Rao et al. (2011) critiques the limited revenue efforts of PRIs despite their constitutional mandate. It notes that Gram Panchayats are the primary revenue-generating tier, while Intermediate and District Panchayats have negligible fiscal autonomy. However, even Gram Panchayats underutilize their revenue-raising powers; 74% of surveyed Gram Panchayats in states like Madhya Pradesh and Rajasthan do not collect any taxes, despite constitutional provisions enabling them to do so. The reasons include outdated tax valuation methods, reluctance to impose taxes due to political considerations, and weak administrative capacity. Non-tax revenues, such as property leases and market fees, present a slightly more promising avenue. Yet, their exploitation is inconsistent, and the absence of reliable financial databases exacerbates the issue. Despite allocations from the Eleventh Finance Commission to build financial databases, only 30% of the funds were utilized, leaving a critical gap in fiscal data for informed policymaking. The study emphasizes the importance of revising outdated tax rates, incentivizing tax collection through performance-linked grants, and introducing penalties for non-payment of taxes.
The revenues of Panchayats are majorly devolved through grants-in-aid from the Centre and State governments with almost negligible contribution from own revenue sources as per RBI (2024). An analysis of the Panchayat finances for the years 2020-21 to 2022-23 given in the report highlights several key trends in revenue and expenditure ratios. Over the three-year period, own revenue was merely 1% of total revenues. The central government contributes the major chunk of the funding of PRI institutions in the form of grants-in-aid, grants from Centrally Sponsored Schemes, and the Central Finance Commission. Nearly 80% of the revenue of PRIs comes from the Central Government. The State Governments contribute a meagre 15%.
Many other state-specific studies collectively reveal a consistent theme: while constitutional provisions and statutory frameworks exist to empower PRIs, systemic inefficiencies and socio-political barriers significantly undermine their fiscal autonomy. Kerala and Karnataka demonstrate that strong administrative capacity, community participation, and proactive governance can unlock the potential of own source revenue. Conversely, Bihar, Odisha, and Rajasthan exemplify the consequences of weak enforcement, outdated policies, and limited public awareness.
The findings highlight the need for a multi-pronged approach: leveraging technology for transparency, fostering community engagement, standardizing tax rates, and strengthening administrative capacities. Enhanced financial autonomy could enable PRIs to transition from dependency on external grants to becoming self-reliant institutions capable of addressing local development priorities effectively. Moreover, integrating climate resilience into local governance offers a transformative opportunity to align fiscal policies with sustainable development goals, ensuring that rural communities are not only economically empowered but also environmentally secure. By bridging the gap between the potential and actual OSR, these studies underscore the transformative potential of PRIs as institutions of decentralised governance, driving India’s rural development agenda.
The literature highlights weak provisions in PRI acts of State government, lack of clarity in activity mapping of the PRI institutions, lack of capacity in terms of human resources to mobilise the revenues, domination of line departments, demeaning role of PRIs, and level of development or poverty as some of the reasons for PRIs becoming the extended implementing arm of the state government rather than autonomous governments at the local level. Therefore, there is a need to review the State Panchayati Raj Acts and Activity Mapping. In Section 3, the Report reviews the Acts of PRIs of the States and their Activity Mapping to understand the powers and role of PRIs in making them financially independent.