RBI Report: Panchayats Should Reduce Dependence on Grants

The Reserve Bank of India (RBI) has released a report on the finances of Panchayati Raj Institutions (PRIs) on January 24, 2024. The report analyses the revenue and expenditure patterns of PRIs across states and suggests ways to improve their financial autonomy and accountability.

Grants are the main source of revenue for PRIs

The report reveals that PRIs rely heavily on grants from higher levels of government for their revenues. Grants account for over 95 percent of the total revenue receipts of PRIs on average across states. The grants come in various forms such as untied grants, tied grants, performance based grants and special category grants. They are disbursed by the central government, based on the recommendations of the Central Finance Commissions (CFCs) and by the state governments, based on the recommendations of the State Finance Commissions (SFCs). They are also allocated through centrally sponsored schemes (CSS).

The report notes that the dependence on grants has increased over the years due to various factors such as inadequate devolution of tax powers to PRIs, low tax base and tax buoyancy, poor collection efficiency, lack of incentives for revenue mobilisation and weak fiscal management.

PRIs should raise their own revenues by using tax and non-tax instruments

The report suggests that PRIs should reduce their dependence on grants and raise their own revenues by using the tax and non-tax instruments available to them. This will help them to improve the quality of their services in rural areas and strengthen the rural economy.

The report identifies some of the potential sources of revenue for PRIs such as property tax, profession tax, entertainment tax, advertisement tax, surcharge on stamp duty, user charges for water supply, sanitation, solid waste management, parking fees, lease rentals, trade licenses, taxes from mobile towers and value capture financing.

The report also highlights some of the best practices adopted by some states such as Andhra Pradesh, Haryana, Himachal Pradesh, Maharashtra, Tamil Nadu and Telangana in enhancing their own revenue generation. These include digitisation of property records, GIS mapping of properties, online payment systems, rationalisation of tax rates and exemptions, periodic revision of tax assessments, outsourcing of collection agencies, performance based incentives and citizen awareness campaigns.

PRIs should improve their fiscal management and accountability

The report emphasises that PRIs should improve their fiscal management and accountability to ensure efficient and effective utilisation of their resources. The report recommends that PRIs should prepare realistic budgets based on reliable data, adhere to fiscal rules and targets, maintain proper accounts and audit systems, disclose financial information to the public, monitor and evaluate outcomes of expenditure programmes and adopt participatory budgeting processes.

The report also suggests that PRIs should leverage alternative sources of financing such as municipal bonds, public-private partnerships (PPPs), corporate social responsibility (CSR) funds and external assistance to augment their capital expenditure for infrastructure development.

The report concludes that PRIs have a crucial role to play in achieving inclusive and sustainable development in rural areas. It calls for a concerted effort by all stakeholders to strengthen the fiscal capacity and autonomy of PRIs.