True administrative devolution of power involves a degree of financial freedom. So, the government?s plan to let Indian village panchayats access resources by borrowing funds directly from the market, by issuing debt, just as city municipalities do, is highly laudatory. As a measure to empower these rural institutions?whose performance all these years has been constrained by a funds crunch?it will go a long way. Though the policy framework allows panchayats to levy as many as 66 types of taxes, user fees and sundry charges, few have been able to operate on anything approaching fiscal fitness, leaving them dependent on state and central funding. This dependency has been particularly crippling for panchayats whose operating space has been cramped by state governments keen to limit these rural institutions? fiscal powers by imposing caps and conditions on their revenue-raising measures.
The 12th Finance Commission?s recommendation of a database of local revenue collections by panchayats is still to be implemented, but available figures show that tax collections form a minuscule 4% of the total financial resources available to panchayati raj institutions. Non-tax revenues are an even thinner slice. Most of the funding is composed of allocations by finance commissions and state governments. It is not a lot of money, either. The funds are too meagre to deliver the sort of outcomes that could alter the quality of rural life. In 2002-03, the latest fiscal year with data available, total panchayat expenditure in India was just 4% of the total spending of the Centre and states. Of this, almost three-fourths was revenue expenditure, with just Rs 6,546 crore left for capital or investment spending. Very roughly, that?s about Rs 1 lakh per village. Clearly, India?s panchayati raj institutions can only hope to make a difference if they can raise their own tax and non-tax resources, and this calls for access to the debt market to finance larger projects. The process might also enhance panchayati awareness of the need for financial discipline, while ensuring greater rural sector accountability. Economies of scale may require that a number of panchayats get together to raise funds jointly for common projects?at least in the early years. The central government should now formulate guidelines for pooled financial structures that will grant the flexibility required to make the most of the new provision.
