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Panchayati Raj Matters! 15th Finance Commission to address Loopholes in Policy Implementation

By Viji Rajesh

As majority of the rural population have given the Modi Government its second mandate, it is vital that the Fifteenth Finance Commission priorities addressing the concerns and fixing the loopholes at Panchayat level. This will result in allowing more autonomy, accountability and participatory development in the village levels.

National Consultation of 15th Finance Commission and Panchayati Raj: Review and Recommendations, New Delhi

The 73rd and 74th amendments were supposed to ensure that Panchayats and Nagar Palikas respectively got political and economic empowerment of a substantial nature, ensuring that all power in a state was not concentrated in the state capital. These amendments allowed each state to decide what areas should be decentralised.

Generally, Finance Commission provides recommendation for the distribution of tax revenue between the Centre and the States and amongst the States themselves since 1951 under Article 280 of the constitution. Two particular highlights of the Commission work include:

1. Reducing the vertical and horizontal fiscal imbalance between taxing power and the spending power of the Centre and States.

2. Providing equalization of all public services across the States.

The most recent expectations of the Finance Commission are distribution of tax revenue and grants-in-aid to the Center and the State and provide measures needed to enlarge the Fund of a State and enhance the resources of the Panchayats & Municipalities.

The 14th Finance Commission had a significant category as it allocated untied grants directly to Panchayat and allowed them to utilize it for whatever needed programmes. An amount of INR 488 for each person that belongs to the Panchayat was allocated to its budget. However, gradually, this particular ‘Untied’ grant was looped with one by one conditions from the finance commission as well as the state and they faded the opportunities for Panchayat freedom to decide on how the grants to be utilised.

Democratic process at the grassroots

The idea of decentralization has been revolving around for a long period of time. Mahatma Gandhi has regarded villages as the keystone of the polity and economy. His idea of Gram Swaraj where every house should be a small republic envisaged India to make the Gram Panchayats.

The first efforts for its statutory rights began during the time of Rajiv Gandhi government where he introduced 64th amendment to that got defeated in Rajya Sabha. In 1993, the 73rd and the 74th Amendment Bills were passed giving Panchayats a statutory status.

This opened new dimension of the decentralisation in the country where regular meetings were made mandatory, reservation for women, SC/ ST and socially disadvantaged groups ensured for political participation, constitutional status to District Planning Committees. This aided in setting up and reinforcing democratic process at the grassroots. The Centre and State were able to transfer functions and some extent functionaries to the local government; however, the financial powers are still intact with the State and the Union.

Centralization of Fiscal Power & Participatory Development

The Indian Revenue system with the advent of GST, has moved towards a centralized tax system which limits States to generate their own revenue through Tax. This condition further reduces the financial power of the Panchayati Raj Institutions (PRIs) and increase dependency on central government.

There are about 270,000 PRIs and urban local bodies, and over three million elected local government representatives. A proper planning and implementation are necessary for the policies to work effectively but it is also important to have financial strength to back up these policies. The tied funds that comes from the state to the Panchayat, dictates how the funds to be used in which category and by how much. This practice restricts Panchayat to solve actual problems in local level. Each Panchayats’ requirement is different and therefore, the local governments have knowledge of best solutions. For Finance Commission recommendations to sustain the participation and decision making of Panchayat is vital as it represents 70% population which is based in rural India.

In Kerala the formulation of People’s Planning during the Ninth Five Year Plan (1997-2002) was big breakthrough in the decentralization endeavours. Development plans were prepared at the village level with people’s participation and based on that the district level plans were made. The state government distributed 30-40% of the state’s plan funds for these participatory development plans. The Kerala experiment combined decentralization with participatory development planning and changed the discourse in the direction of democratic decentralization.

Loopholes in Implementation of Fourteenth Finance Commission (FFC) grants at Panchayat Level

a) Top to Bottom Conditioning: FFC has made it compulsory to use the grants for improving basic services. Most of these funds have been used in the construction of roads or beautification of Gram Panchayats offices. Moreover, data available reflects that only 50-60% of the grants were utilized for the allocated purposes. The important aspects like agriculture, rural development, education, health, women and child development, social justice etc. has been ignored in the FFC grants.

b) Failure in effective monitoring systems: More than 2,50,000 Panchayats are there in India but how many Gram Sabha meeting happen? Most of the reports and official documents are falsified to show that the meeting was held. People are unaware of FFC funds and lack related information.

c) Exclusion from FFC grants: The lower two tiers, the Block Panchayat and the Zilla Panchayat were kept out of the award by the FFC. Most of these local bodies have very limited amount of resources to function appropriately and depend on the Centre and State funds to tackle their day to day challenges.

d) Faulty accounting system: Most of the accounts are not maintained or are misreported due to facts such as lack of professional & adequate staff. There is greater difficulty in assessing the requirements of resources needed by the local bodies to carry out their basic functions and development expenditures.

e) Parallel Bodies (PBs) are created for supposedly speedy implementation and greater accountability. PBs takes over the legitimate space of PRIs and undermines the PRIs with their superior resource endowments. The existence of Parallel bodies creates overlaps, duality, and alienation between the PRIs and PBs. For e.g. In Uttar Pradesh, water user Groups / Site Implementation Committee (SIC) make policy decisions like the rates of water charges, construction, maintenance and management of link and main drains; in Himachal Pradesh a vigilance committee is formed to supervise Gram Panchayats works/schemes costing upto Rs. 50,000. This sometimes hinders and weakens the functioning of the PRIs.

Considerations for the 15th Finance Commission 2020-2025

  1. Finance commission could release untied funds towards more important aspects of Panchayats; agriculture, rural development, education, health, women and child development, social justice.

  2. In the areas where Mukhiya or the head lack the technical knowledge of certain situation, civil society as a resource for effective implementation of Panchayat can be systematically incorporate to create more inclusive development.

  3. There is a need for government to appoint professionals (Charted Accountants) who will follow standardized systems. This result in transparency and accountability in the financial system at Panchayat level.

  4. In both district level and state level officials expressed their concern of lack of monitoring and supervision funds. One of the solutions that could increase the transparency and accountability is maintaining a separate provision for the monitoring and supervision.

  5. Lack of awareness on the usage of the funds can be can be address by mandatory involvement of every statutory body in the lower tier (Zilla Panchayat & Block Panchayat) in Gram Panchayat Development Plan. This will help prioritizing the needs of different sectors in utilization of the funds.

  6. Elected representatives, especially women elected representatives need to be provided effective training not only on the role, power and functions but also on leadership as they can be involved in further leadership roles.

It is important that the 15th Finance Commission prioritize the role of PRIs and involve them in participatory planning with delegation of the financial responsibilities to the lower tiers of the government. Additionally, assigning clear functionaries along with effective monitoring that would bring sustainable development for the rural population of India.



  1. Finance Commission of India. (2019).

  2. National Consultation Fifteenth Finance Commission and Panchayati Raj: Review and Recommendations.

  3. Parallel Bodies and Local Self Governance.

  4. Local government Directory (2019).

  5. Ministry of Panchayati Raj.

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