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2022 NOV   19

Funding of Local Self Governments

2022 NOV 14

Mains   > Constitution   >   Local self governance   >   Governance


  • The Reserve Bank of India (RBI) has highlighted several lacunae in the working of municipal corporations, stating that there has been no appreciable improvement in their functioning despite institutionalisation of the structure of local governance in India.


  • Local self-government system in India was constitutionalised through the 73rd and 74th Constitutional Amendment Acts of 1992.
    • 73rd amendment act added Part-IX entitled ‘The Panchayats’ and consists of provisions from Articles 243 to 243 O. In addition, the act also added a new Eleventh Schedule to the Constitution.
    • 74th amendment Act added Part IX-A entitled ‘The Municipalities’ and consists of provisions from Articles 243-P to 243-ZG. In addition, the act also added a new Twelfth Schedule to the Constitution.


I. Panchayats:

  • Grants from the Union Government based on the recommendations of the Central Finance Commission as per Article 280 of the Constitution.
  • Devolution from the State Government based on the recommendations of the State Finance Commission as per Article 243-I.
  • Internal Resource generation (Provided in Article 243H)
    • Tax: Land tax, Property/House tax, Tax on non-agricultural land, Taxes on fairs/festivals, cess on stamp duty, Sanitation/drainage/conservancy tax, water tax, lighting tax, tax on construction and public works etc.
    • Non-Tax: License fee, fee on usage of panchayat shelter, fee on using common use resources like grazing land, fee on markets & weekly bazaars, user charges for hospitals and schools, street cleaning fee etc.
  • Loans from State Govt:
    • Eg: Interest free loan is given to Panchayat/Panchayat Samitis for installation of Tube-wells, Pumping sets in Haryana with repayment period of 30 years
  • Programme specific allocation under Centrally sponsored schemes like PM Gram Sadak Yojana.
  • Additional Central Assistance:
    • Eg: Backward Regions Grant Funds (BRGF) Programme administered by Ministry of Panchayati Raj is an Additional Central Assistance (ACA) Scheme
  • Joint funding:
    • Panchayats can jointly execute projects by collaborating with private donors or NGOs. Eg: Alstom’s CSR initiative 'Rural Rising'- an integrated rural development program at Selakarachal Gram Panchayat in Coimbatore
  • Loans from Rural Infrastructure Development Fund in 3 areas: Agriculture, Social sector, Rural connectivity.

II. Urban Local Bodies:

  • Tax Revenue:
    • The revenue from the local taxes includes property tax, water tax, tax on animals, lighting tax, pilgrim tax, market tax etc.
    • In addition, the municipal bodies impose various cesses like library cess and education cess.
  • Non-Tax Revenue:
    • This source include rent on municipal properties, fees and fines, royalty, profits and dividends, interest, user charges and miscellaneous receipts.
  • Grants:
    • These include the various grants given to municipal bodies by the Central and State Governments for several development programmes, infrastructure schemes, urban reform initiatives and so on.
  • Devolution:
    • This consists of the transfer of funds to the urban local bodies from the state government on the basis of the recommendations of the state finance commission.
  • Loans:
    • The urban local bodies raise loans from the state government as well as financial institutions to meet their capital expenditure.
    • They can borrow from the financial institutions or other bodies only with the approval of the state government.


  • Decline in own-tax revenue:
    • With the introduction of GST, many revenue sources like entertainment tax have been taken away from the local elf government. This has reduced the capacity of LSG to generate their own funds. 
  • Under-realization of taxes:  
    • Property tax is the most important tax revenue for local governments. However, land revenue collection has remained low due to low base values applied to properties and low rates of taxes levied.
  • Rising revenue expenditure:
    • Expenditure in the form of establishment expenses, administrative costs and interest and finance charges is rising, but capital expenditure is minimal.
  • Lack of devolution of power by State government:
    • Some State Governments have not devolved enough taxation powers to the Panchayats.
  • Financial dependency:
    • With own revenue generation capacity of municipal corporations declining, dependence on the devolution of taxes and grants from the central and state governments have risen.
    • Also, the resources from higher level governments are often tied funds and involve conditionalities. This restricts the local bodies’ financial autonomy.
  • Issues with State finance commission:
    • Several state governments have not set up state financial commissions (SFCs) in a regular and timely manner.
    • Also, since SFC recommendations are not binding, State Governments often deviate from the devolution package suggested by the it.
    • Hence, SFCs have not been effective in ensuring rule-based devolution of funds to Local governments.
  • Weak bond market:
    •  LSGs, especially Municipal Corporations (MC), rely on issuing of bonds to finance their resource gaps. Eg: Bengaluru MC floated municipal bonds for the first time in India in 1997, followed by Ahmedabad MC in 1998.
    • However, the absence of a well-developed market for municipal bonds has hindered the progress of this financing mechanism.
  • Limited emphasis on outcomes:
    • Most municipalities only prepare budgets and review actuals against budgeted plans but do not use their audited financial statements for balance sheet and cash flow management, resulting in significant inefficiencies.  
    • Also, there has not been limited emphasis to ensure that grants are utilised in a proper and effective manner. Auditing agencies like CAG conduct a post-mortem examination of accounts.


  • Innovative financing mechanisms:
    • Grassroot level governments should explore different innovative bond and land-based financing mechanisms to augment their resources.
  • Uphold FC’s recommendations:
    • Central and state governments should monitor the release and expenditure of Finance Commission grants to ensure that there is no delay in their release.
  • Share GST revenue:
    • The RBI report has stated that in order to improve the buoyancy of local government’s revenue, the Centre and the States may share one-sixth of their GST.
  • Ensure effective auditing:
    • LSGs should adopt sound and transparent accounting practices with proper monitoring and documentation of various receipt and expenditure items.
    • Panchayats should also be encouraged to carry out local audits regularly so that Finance Commission grants are not delayed.
    • Institutionalising a system of social audit is essential for improving local service delivery and for ensuring compliance with laws and regulations.


Q. Assess the importance of the Panchayat system in India as a part of local government. Apart from government grants, what sources the Panchayats can look out for financing developmental projects?  (GS 2, CSE 2018)