Finances of Panchayats and Status of Own Revenues in Telangana State: A Critique

Date01 March 2022
Published date01 March 2022
Subject MatterArticles
Finances of Panchayats
and Status of Own
Revenues in Telangana
State: A Critique
M. Gopinath Reddy1 and Bishnu Prasad Mohapatra2
The Panchayati Raj Institutions (PRIs) have emerged as instruments of local gov-
ernment since 1992 with the passage of the 73rd Constitutional Amendment
Act in India. In Telangana, the state government in the recent period has enacted
State Panchayat Raj Act and constituted its first State Finance Commission (SFC).
This article is a part of a larger study conducted in the context of the constitution
of the first SFC. The article reveals that the own revenue of panchayats is quite
low and transfer from the state and central governments constitute two key
sources of these bodies. However, these bodies have faced various internal and
external challenges while imposing and implementing taxes and fees to augment
their sources of revenues. It is on this reality that this article suggests for the
devolution of more taxes to PRIs by the SFC for strengthening their revenues
and sharing at least 10% of the state’s revenue to meet service delivery functions.
Fiscal decentralisation, taxes and non-taxes, state’s own tax revenue, Telangana
The role of the rural local self-governing institutions in achieving the agenda of
fiscal decentralisation has been vigorously explored by many scholars in India
and abroad. These institutions as an instrument of decentralised governance have
emerged as a pioneer of promoting development in rural areas in many countries.
The increasing attention paid by the state administrative apparatus to effective
delivery of goods and services through decentralised institutions has made them
as the nerve centre for promoting development at the grassroots level. The process
Indian Journal of Public
68(1) 100–115, 2022
© 2022 IIPA
Reprints and permissions:
DOI: 10.1177/00195561211052112
1 Centre for Economic and Social Studies (CESS), Hyderabad, Telangana, India.
2 School of Liberal Arts, MIT-World Peace University, Pune, Maharashtra, India.
Corresponding author:
M. Gopinath Reddy, Centre for Economic and Social Studies (CESS), Begumpet, Hyderabad,
Telangana 500 016, India.
Reddy and Mohapatra 101
of devolving required functions, functionaries and funds to these institutions in
many cases helped them to discharge their role effectively as institutions of self-
government. Considering the advantages of decentralisation, many countries have
devolved administrative, political and fiscal responsibilities to lower levels of
government. This trend towards decentralisation is seen in countries with federal
as well as unitary systems and has spanned across developing as well as devel-
oped countries. The decentralisation policies employed by the government of
various countries have helped the local governments to effectively discharge their
functions as institutions of self-government (Bardhan, 2002).
India has been witnessing the evolution and institutionalisation of decentral-
ised governance in rural areas since the pre-Independence period. The process
of democratic decentralisation in India has witnessed a shift in the context of the
evolution of local governments with the enactment of the 73rd Amendment Act
in 1992. The emergence of the Panchayati Raj Institutions (PRIs) as an instru-
ment of a decentralised governance system in 1992 with the passage of the 73rd
Constitution Amendment Act has deepened in the era of democratic decentralisa-
tion. The rationale behind the enactment of the 73rd Amendment Act was that
such decentralisation and self-governance would lead to improved decision-
making and augment and make the provisioning of public goods more equitable
(Jha et al., 2019). A key way of provisioning public goods is devolving functions
to the PRIs along with functionaries and finances for their effective working as
an institution of democratic decentralisation. The size and significance of rural
local governments is a key determinant of devolving fiscal resources to them and
forwarding the agenda of fiscal decentralisation (Jha, 2002; Jena & Gupta, 2008).
The 73rd Amendment Act has vested a wide range of powers to the PRIs to
explore their revenues to make them an institution of self-government. A signifi-
cant component of this Act is vesting fiscal powers to the PRIs which are men-
tioned under Article 243H of the Constitution. The important components of the
Act are Article 243G and Article 243ZD which provide for the creation of institu-
tions of self-government at the local level along with the devolution of financial
and functional responsibilities which include ‘planning for economic develop-
ment and social justice. Further, Article 243I of the Act prescribes that the gover-
nor of a state shall, as soon as may be within one year from the commencement
of the 73rd Amendment Act, 1992, and thereafter at the expiration of every fifth
year, constitute a finance commission to review the financial position of the PRIs
to make recommendations to the governor on these matters. The most critical
function of the State Finance Commission (SFC) is to determine the fiscal transfer
from the state to the local bodies in the form of revenue sharing and grants-in-aid.
Transfer of fiscal resources to the panchayats can be broadly divided into three
categories, namely, (a) own sources of revenue, (b) funds flowing from the state
and central governments by way of devolution, assignment of taxes, grants-in-
aid and (c) funding under different Central schemes. The transfer from state and
central governments are further clubbed into two broad heads: (a) tied (special
purpose) grants, and (b) untied (general purpose) grants. The own revenues of
the PRIs are derived from various sources of taxes, tools and fees. A key source
of revenue transfers from central government and state government as per the

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