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Finances of PRIs

Why is it in the news?

  • The Reserve Bank of India’s 2022-23 report on Panchayati Raj Institutions’ finances provides an assessment of their fiscal status and their contribution to India’s socio-economic development.

Key Findings of the Report

  • Grant Dependency: PRIs rely heavily on grants from the State and Union Governments, with only about 1% of their revenue being earned independently. This indicates a significant dependence on external sources for funding.
  • Total Revenue: In the fiscal year 2022-23, the total revenue of PRIs in India amounted to ₹35,354 crore. While this is a substantial sum, the majority of it comes from grants rather than independent revenue generation efforts.
  • Own Revenue vs. Grants: The individual contributions of PRIs through own tax revenue (₹21,000 per panchayat) and non-tax revenue (₹73,000 per panchayat) are minimal compared to the grants received from the Central and State governments.
  • State-wise Performance: Kerala and West Bengal stand out with higher average revenues per panchayat, indicating better revenue generation capabilities compared to other states. Conversely, states like Andhra Pradesh, Haryana, Mizoram, Punjab, and Uttarakhand exhibit lower revenue per panchayat, suggesting potential challenges in revenue generation.
Functions and Finances of PRIs

·       Expansion of Responsibilities: The 73rd Amendment to the Indian Constitution in 1992 significantly expanded the responsibilities of PRIs, entrusting them with 29 subjects outlined in the Eleventh Schedule. These subjects encompass a wide range of areas crucial for local development and governance, such as rural development, education, health, agriculture, and more.

·       Own Resources: PRIs have their own revenue sources, including taxes (such as property taxes) and non-tax revenue (like fees and fines). They also generate capital receipts from the sale of land. However, these own resources contribute only a small fraction to their total revenue.

·       Government Funding: PRIs receive substantial funds from higher levels of government in the form of grants-in-aid, loans, and recommendations from State Finance Commissions. These funds are essential for the implementation of developmental schemes, creation of infrastructure, and general administration in rural areas.

 Challenges and Constraints highlighted in the Report

  • Limited Own Revenues: PRIs face challenges in generating sufficient own revenue. The revenue they generate through local taxes and fees is minimal compared to their total revenue, which is primarily grant-dependent.
  • Low Expenditure: Despite their responsibilities and revenue, PRIs exhibit low expenditure levels, constituting less than 0.6% of the gross state domestic product for all states. This suggests potential underutilization of funds or inefficiencies in spending.
  • Grant Dependency: The heavy reliance on grants from higher government levels (about 95% of total revenue) limits the financial autonomy of PRIs, potentially affecting their decision-making and effectiveness in local governance.
  • Inter-State Variations: There are significant variations across states in terms of the devolution of powers and functions to PRIs, impacting their socio-economic outcomes. States with higher levels of devolution tend to show improved outcomes, highlighting the importance of decentralization.

 Way Forward

  • Boosting Revenue Generation: PRIs need to explore innovative approaches to enhance their revenue-generating capabilities. This may involve expanding the tax base, improving administrative infrastructure, and implementing clearer guidelines for revenue collection.
  • Fair Revenue Sharing: Effective implementation of Article 243(I) and recommendations from State Finance Commissions can ensure fair revenue sharing between different levels of government, providing PRIs with a more stable and predictable source of funding.
  • Strengthening Local Administration: Investing in the capacity-building of local administrative staff and officials can improve financial management practices within PRIs, leading to better utilization of resources and enhanced governance.
  • Promoting Decentralization: Further efforts to promote decentralization and empower PRIs are essential for enhancing their role in local development and governance. This may involve devolving more powers and functions to PRIs and promoting participatory decision-making processes.


  • Role of PRIs: PRIs play a crucial role in grassroots development and governance, acting as the primary interface between rural populations and higher levels of government. Strengthening PRIs is essential for ensuring effective and inclusive development across rural India.
  • Empowerment: The empowerment of PRIs aligns with the vision of Mahatma Gandhi for local self-governance, emphasizing the importance of bottom-up approaches to development.
  • Innovation and Transparency: Embracing innovation, promoting transparency, and enhancing accountability at the Panchayat level are key to improving the effectiveness and sustainability of PRIs in India’s governance framework.
If we would see our dream of Panchayat Raj, i.e., true democracy realized, we would regard the humblest and lowest Indian as being equally the ruler of India with the tallest in the land.

(Mahatma Gandhi)

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