Article

Finances of Panchayats Indian Journal of Public

Administration
and Status of Own 68(1) 100–115, 2022
© 2022 IIPA
Reprints and permissions:
Revenues in Telangana in.sagepub.com/journals-permissions-india
DOI: 10.1177/00195561211052112
State: A Critique journals.sagepub.com/home/ipa

M. Gopinath Reddy1 and Bishnu Prasad Mohapatra2

Abstract
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.

Keywords
Fiscal decentralisation, taxes and non-taxes, state’s own tax revenue, Telangana

Introduction
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

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.
E-mail: mgopinathreddy@gmail.com
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
102 Indian Journal of Public Administration 68(1)

recommendations of the Union Finance Commission (basic and performance

grants) and Union State Finance Commission (devolution, assignment and grants-
in-aid). The devolved revenues are transfers from the state government to PRIs as
per the recommendations of the SFC for the implementation of various schemes
and programmes (Sahasranaman, 2012). The assigned revenues are the assign-
ment of taxes and fees from the state to the PRIs and the grants-in-aids are part of
both general and special purpose grants to the PRIs.
In Telangana state, the PRIs have been functioning as an institution of self-
government since the formation of the state in 2014. In the context of the on-going
development process and governance reforms in the state with the enactment of
the 73rd Amendment Act and the Telangana Panchayati Raj Act, 2018, the PRIs
have emerged as the nerve centre of promoting rural development. The devolution
policies employed by the state government have brought the issue of devolution of
powers to the forefront. In the recent year (2018), the state government has enacted
the Telangana Panchayati Raj Act, 2018 for the effective functioning of PRIs in the
state. The state government has also constituted its first SFC in the year 2015.
This article is an outcome of a larger study conducted in the state in the context
of the formation of the first SFC in 2015. It tries to unfold the issues of devolu-
tion of funds to the PRIs and examine as to what extent fiscal devolution has
impacted the effective functioning of the PRIs in the state. It also tries to examine
the finances of the state with a focus on state’s own revenue (SOR) and state’s
own tax revenue (SOTR) and how it has influenced the finances of the PRIs in the
state. The article is divided into two broad sections: (a) finances of the state and
(b) finances of the PRIs of the state and status of the transfer of resources to these
bodies from various sources. In the last section, we have raised some important
issues and suggested few points for strengthening the finances of the PRIs and
improving their revenues.
Data for this article are mainly drawn from primary and secondary sources.
In particular, we gathered data from the Department of Panchayat and Rural
Development and State Finance Department, Government of Telangana. We
also downloaded reports of the Comptroller and Auditor General (CAG) of
India and reports of the Reserve Bank of India to understand the fiscal scenario
of the state and PRIs.

Panchayats in Telangana State and Status of Devolution

Profile of Telangana State

Telangana came into existence as a state of the Indian Union on 2 June 2014 with
the geographical area of 112,077 sq. km. As specified in the Andhra Pradesh
Reorganisation Act, 2014, the state of Telangana when formed had ten districts. At
present, it has thirty-three districts. The total population of the state has increased
to 3.50 crore in 2011 with an increase of 42 lakhs, registering a growth of 13.58%
over the previous census year 2001. Majority of the population in the state resid-
ing in rural areas mainly depend on agriculture for their livelihood.
Reddy and Mohapatra 103

Working of Panchayats and Status of Devolution

Profile of PRIs
The state of Telangana has institutionalised the three-tier PRIs in the state. The
Zilla Praja Parishads (ZPPs) at the district level, the Mandal Praja Parishads
(MPPs) at the intermediate level and the Gram Panchayats (GPs) at the village
level have been institutionalised as three-tier PRIs in the state. The state has
12,751 GPs, 535 MPPs and 32 ZPPs in (Table 1). Four ZPPs are part of the sched-
uled areas and of the implementation of the Panchayat Extension to Scheduled
Areas (PESA) Act, 1996. Table 1 presents the status of the three-tier PRIs in the
state of Telangana.

Working of Panchayats and Status of Devolution

In the recent period, the state government has enacted a new Act otherwise known
as the Telangana Panchayati Raj Act, 2018. The new Act has vested various
powers to the PRIs in conformity with the 73rd Constitutional Amendment Act.
The key features of the Act are (a) Section 43(5)– role of the GP Secretary on
finances of the GPs, (b) Section 64(1)– taxation and collection of taxes and fees
by the GPs and (c) Section 70(1)– management of GP fund by a GP. This legal
provision has also vested powers in MPPs and ZPPs on the matters of finances
including (a) finances of the MPPs and powers of strengthening own revenues,
and (b) finances of the ZPPs and powers of strengthening own revenues.
The status of functional devolution in the state was through the Devolution
Index Study3 conducted by the Ministry of Panchayati Raj in 2015–2016. As per
this index, Telangana ranks 17 among the states as far as devolution of powers
to Panchayats is concerned (Ministry of Panchayati Raj, Government of India,
2015–2016).

SFC in Telangana
The Telangana Panchayat Raj Act, 2018, has provided enough space for the con-
stitution and functioning of the SFC under Section 244 of the Act. A historical
analysis of the institutionalisation and functioning of SFCs in Telangana and
Andhra Pradesh (when the state was a part of Andhra Pradesh) reveals that consti-
tuting SFCs on time was given a go by during the long struggle for Telangana
state. It is revealed from the data collected from the state Panchayat Raj and Rural
Development department that before the constitution of first SFC, there were
three SFCs, namely SFC-I in 1994, SFC-II in 1998 and SFC-III in 2003–2004
constituted in the undivided Andhra Pradesh. The SFC-I recommended

Table 1. Profile of the PRIs in Telangana.

Sl. No. PRIs Number

1 Zilla Praja Parishads 33
2 Mandal Praja Parishads 535
3 Gram Panchayats 12,751
Source: Department of Panchayat Raj and Rural Employment, Telangana, 2018.
104 Indian Journal of Public Administration 68(1)

devolution of `818.84 crore to PRIs, the SFC-II recommended for the devolution
of `1,167.33 crore, whereas SFC-III recommended for the devolution of `1,274.34
crore to the PRIs.
The formation of first SFC was notified on 16 March 2015. Owing to the delay
in constituting the first SFC, the funds that came to PRIs of Telangana state were
based on the recommendations of the third SFC of undivided Andhra Pradesh.

Financial Position of Telangana State and

Status of Own Revenue
Telangana state government, like any other state government, has two sources
of receipts: revenue and capital. Revenue receipts consist of own revenue (own
tax revenue and non-tax revenue) and transfers from the union government
(state’s share of union taxes and duties and grants-in-aid). Capital receipts com-
prise non-debt (miscellaneous capital receipts such as proceeds from disinvest-
ments, recoveries of loans and advances) besides debt receipts (internal sources
such as market loans, borrowings from financial institutions/commercial banks,
and loans from the Government of India). Expenditure is classified into revenue,
capital and loan accounts. With the recent developments, plan and non-plan
classification lost its relevance.

Fiscal Situation of the State in 2014

The state started with a revenue surplus situation at `369 crore and with a fiscal
deficit of about `9,410 crore and a primary deficit about `4,183 crore when it was
carved out from Andhra Pradesh in 2014 (Table 2).
The total revenue receipts of the state were `51,042 crore, which is 10.09% of
the Gross State Domestic Product (GSDP) of the state (Table 3).
Total expenditure for the 10 months of the financial year (2 June 2014–31
March 2015) amounted to `283,277 crore which include revenue expenditure,
capital expenditure, loans and advances and disbursements (repayment of debt
and public account).
As the revenue expenditure is lower than total revenue receipts by `369
crore, the newly formed state started with a revenue surplus situation. In the total
expenditure (excluding disbursements), the share of revenue expenditure is about
84% followed by capital expenditure and nominal loans and advances (Table 4).
Total expenditure is higher than total revenue by nearly 19 percentage points.

Table 2. Budget 2014–2015: Fiscal Situation.

Major Fiscal Indicators ` in Crores Percentage of GSDP

Revenue deficit/surplus 369 0.07
Fiscal deficit –9,410 –1.86
Primary deficit –4,183 –0.83
Source: CAG (2017).
Reddy and Mohapatra 105

Table 3. Composition of Total Revenue: 2014–2015.

Particulars ` in Crores Relative Share (%) Percentage of GSDP

Revenue receipts 51,042 100 10.09
Share of central taxes 8,189 16.04 1.62
Tax revenue 29,288 57.38 5.79
Non-tax revenue 6,447 12.63 1.27
Grants-in-aid 7,118 13.95 1.41
Source: Telangana State Government Budget Documents and RBI Study on State Finances.

Fiscal Situation of the State in 2015–2019

Table 5 shows the fiscal situation in absolute figures during 2015–2019. Total
receipts have increased in 2016–2017 mainly because of a considerable increase
in capital receipts which are mostly borrowings. Total expenditure has also
increased significantly mainly because of the capital expenditure and capital dis-
bursements (debt repayments).
The composition of receipts also shows that, barring 2016–2017, more than
75% is constituted by revenue receipts and about 25% is from capital receipts
(Table 6).

Table 4. Expenditure Pattern: 2014–2015.

Percentage of
Total Total
Sl. No. Particulars ` in Crores Revenue Expenditure GSDP
1 Revenue expenditure 50,673 99.28 83.72 10.02
2 Capital expenditure 8,373 16.40 13.83 1.66
3 Loans and advances 1,483 2.91 2.45 0.29
4 Total expenditure 60,529 118.59 100 11.97
(1 + 2 + 3)
Source: Telangana State Government Budget Documents and RBI Study on State Finances.

Table 5. Fiscal Situation: from 2015–2016 to 2018–2019.

(` in Crores)
Sl. RE 2017– BE 2018–
No. Particulars 2015–2016 2016–2017 2018 2019
1 Revenue receipts 76,133.83 82,817.96 108,148.24 130,975.11
2 Capital receipts 21,683.29 50,832.58 34,837.17 43,507.17
3 Total receipts (I+II) 97,817.12 133,650.54 142,985.41 174,482.28
4 Revenue expenditure 75,895.74 81,432.20 106,602.85 125,454.70
5 Capital expenditure 13,590.39 33,370.57 25,447.15 33,369.10
6 Loans and advances 5,591.51 3,452.02 5,396.85 9,035.55
7 Capital disbursements 2,845.24 15,568.54 5,059.48 6,594.48
8 Total expenditure 97,922.87 133,823.32 142,506.33 174,453.84
9 Revenue surplus 238.09 1,385.76 1,545.39 5,520.41
10 Fiscal deficit –18,856.15 –35,280.81 –23,491.44 –29,077.07
11 Primary deficit –11,298.61 –26,671.62 –12,352.83 –17,385.96
Source: Telangana State Government Budget Documents and RBI Study on State Finances.
106 Indian Journal of Public Administration 68(1)

Table 6. Composition of Receipts (%).

Particulars 2015–2016 2016–2017 RE 2017–2018 BE 2018–2019

Revenue receipts 77.8 62.0 75.6 75.1
Capital receipts 22.2 38.0 24.4 74.9
Total receipts 100 100 100 100
Source: Telangana State Government Budget Documents and RBI Study on State Finances.

Regarding expenditure composition, the study shows that barring 2016–2017,

revenue expenditure showed a consistent decline while capital expenditure
showed a consistent increase in the study period. Loans and advances fluctuated
and have not reached the level of 2015–2016 (Table 7).
If only revenue, capital and loan accounts are considered, keeping aside
the capital disbursements, barring 2016–2017, the composition of expenditure
shows that there is a consistent increase in capital expenditure and a consistent
decline in revenue expenditure (Table 8). The net result of receipts and expendi-
ture is the surplus or deficit situation. The composition of fiscal deficit shows
that there is a consistent increase in the revenue surplus situation and capital
expenditure.
The overall fiscal scenario of the state from 2014–2015 to 2018–2019 indi-
cates that the revenue surplus continues to exist ever since the formation of the
state. Efforts have been made for revenue augmentation. However, tax/GSDP
achieved by the state government is much lower than the projections made by
the Fourteenth Finance Commission. On the contrary, the fiscal deficit/GSDP of
the state government are much higher than the target set by the Fourteenth Finance
Commission which is a cause of concern.

Table 7. Expenditure Composition (%).

Expenditure RE 2017– BE 2018–

Composition 2014–2015* 2015–2016 2016–2017 2018 2019
Revenue 13.45 77.51 60.85 74.81 71.91
expenditure
Of which 1.49 7.72 6.43 7.82 6.70
interest
payments
Capital 2.22 13.88 24.94 17.86 19.13
expenditure
Loans and 0.39 5.71 2.58 3.79 5.18
advances
Capital 83.93 2.91 11.63 3.55 3.78
disbursements
Total 100.00 100.00 100.00 100.00
expenditure
Source: Telangana State Government Budget Documents and RBI Study on State Finances.
Note: *Calculation is based on 10 months data of 2014–2015.
Reddy and Mohapatra 107

Table 8. Expenditure Composition: Revenue + Capital + Loans and Advances (%).

RE 2017– BE 2018–
Expenditure 2014–2015* 2015–2016 2016–2017 2018 2019
Revenue 83.72 79.83 68.86 77.56 74.74
expenditure
Capital 13.83 14.29 28.22 18.51 19.88
expenditure
Loans and 2.45 5.88 2.92 3.93 5.38
advances
Total 100.00 100.00 100.00 100.00 100.00
expenditure
Total 60,528.88 95,077.63 118,254.79 137,446.85 167,859.36
expenditure
(` in crores)
Source: Telangana State Government Budget Documents and RBI Study on State Finances.
Note: *Calculation is based on 10 months data of 2014–2015.

Finances of Panchayats and Status of Own Revenues

The financial position of the PRIs and their role in exploiting own sources for
revenue generation purpose in Telangana state has been discussed in this section
to explore the overall financial scenario of the PRIs. The major sources of finance
of the PRIs are (a) own revenue, (b) transfers recommended by the SFC and
Central Finance Commission (CFC), and (c) transfers from central and state
governments for various developmental schemes and programmes. Sources of
data for the above information are mainly drawn from the Commissioner,
Panchayat Raj Department, Government of Telangana.

Own Revenues of the PRIs in the State

The own sources of revenue of the PRIs in the state include: (a) own revenue
generated by the collection of tax (property tax, water tax, advertisement fee,
etc.), and (b) non-tax revenues (rents from markets, shops and other properties,
auction proceeds, etc.).
Data presented in Table 9 show that there is a steady increase in the Property
Tax (of the own source revenue or OSR) of GPs (from `102 crore in the year
2010–2011 to nearly `400 crore in the year 2017–2018) as shown in the table.
Other taxes are not found increasing adequately. Regarding non-tax sources, fees/
user charges and auctions and fees are the major sources. There is still a large
potential to tap from various sources.

Transfer from State Government

The PRIs have received financial assistance from the state government under
various heads such as: (a) transfer under assigned revenue, (b) SFC devolution,
(c) grants-in-aid, and (d) schematic grants. In this section, it has been attempted to
outline these grants.
 108 Indian Journal of Public Administration 68(1)

Table 9. Own Revenue of the Gram Panchayats.

(` in Crores)
Sl. 2010– 2011– 2012– 2013– 2014– 2015– 2016– 2017–
No. Item 2011 2012 2013 2014 2015 2016 2017 2018 Total
A Tax
1 Property tax 102.63 85.49 101.66 120.66 241.52 257.67 361.74 388.76 1660.13
2 Professional 0.11 0.14 0.16 0.18 0.20 0.20 0.24 0.24 1.47
tax
3 Entertainment 0.25 0.27 0.27 0.27 0.27 0.28 0.29 0.29 2.19
tax
Total (A) 102.99 85.90 102.09 121.11 241.99 258.15 362.27 389.29 1,663.79
B Non-tax
1 Fees/user 22.98 22.47 23.20 24.58 25.51 25.83 25.88 25.91 196.36
charges
2 Any other 19.98 22.58 22.59 22.62 22.75 22.82 22.94 22.96 179.24
(auctions &
fees)
Total (B) 42.96 45.05 45.79 47.20 48.26 48.65 48.82 48.87 375.60
Grand total (A+B) 145.95 130.95 147.88 168.31 290.25 306.8 411.09 438.16 2,039.39
Source: Commissioner of Panchayat Raj, Government of Telangana.

Transfer from Assigned Source of Revenue

The main sources of revenue of the PRIs are in the form of assigned revenue such
as stamp duty and seigniorage fee. Table 10 shows the status of the transfer of
assigned revenues from the state government to the PRIs in Telangana from
2014–2015 to 2017–2018. It shows that the PRIs have received a large chunk of
revenue from stamp duty which is 90.08% of the total assigned revenue.

Transfer from SFC

Regarding the transfer of grants to PRIs under SFC grants, it is revealed from
Table 11 that the budget estimate under SFC grants during 2014–2018 was
`313.68 crore whereas the actual release was `95.44 crore, which is 30.43% of
the total estimated amount. Except for 2014–2015, in all the years, there was a
deviation observed in releasing amount to PRIs under this head which can be
observed from the data presented in Table 11.

Grant-in-Aid
Table 12 presents the status of the transfer of funds to PRIs under grant-in-aid from
the state government. It is revealed from the data presented in the table that the PRIs
have received maximum grants under the Honorarium of PRI Members, which is
79.78% of the total grant-in-aid. However, year-wise fluctuation was also observed.

Transfers to PRIs for Implementation of Schemes and Programmes

Table 13 presents the status of transfer to PRIs under various schemes from
2014–2015 to 2017–2018. It shows that `24.24 crores (for the years from
2014–2015 to 2017–2018) has been transferred to PRIs during for years with an
average of just `6 crore per annum.
Reddy and Mohapatra 109

Table 10. Transfer from Assigned Revenue Sources to PRIs.

(` in Crores)

Types of Assigned Years

Revenue 2014–2015 2015–2016 2016–2017 2017–2018 Total
Professional tax 8.27 14.84 7.42 0.00 30.53
4.28% 6.66% 3.86% 0% 3.38%
Stamp duty 172.69 188.53 173.18 278.38 812.78
89.40% 90.02% 90.02% 94.76% 90.08%
Seigniorage fee 12.20 19.36 11.79 15.38 58.73
6.32% 8.69% 6.13% 5.24% 6.51%
Total 193.16 222.73 192.39 293.76 902.24
100% 100% 100% 100% 100%
Source: Commissioner of Panchayat Raj, Government of Telangana.

Table 11. Transfer under SFC Grants to the PRIs.

(` in Crores)
SFC
Grants Years
2014–2015 2015–2016 2016–2017 2017–2018 Total
BE Actual BE Actual BE Actual BE Actual BE Actual
Release Release Release Release Release
SFC 19.60 19.60 98.03 43.64 102.03 4.00 94.02 28.20 313.68 95.44
Grants
– 100.00% – 44.52% – 3.92% – 30% – 30.43%
Source: Commissioner of Panchayat Raj, Government of Telangana.

Table 12. Transfer Under Grant-in-Aid to the PRIs.

(` in Crores)
Years
Grant-in-Aid 2015–2015 2016–2017 2017–2018 2018–2019 Total
CC charges 9.05 5.28 2.64 0.00 16.97
43.41% 18.26% 1.55% 0% 5.44%
Honorarium 4.68 8.03 159.39 76.83 248.93
22.45% 27.78% 93.85% 83.12% 79.78%
Per capita grant 7.12 15.60 7.80 15.60 46.12
34.15% 53.96% 4.59% 16.88% 14.78%
Total 20.85 28.91 169.83 92.43 312.02
100% 100% 100% 100% 100%
Source: Commissioner of Panchayat Raj, Government of Telangana.

Transfer from the Central Government

Regarding the status of Central Government transfers to the PRIs, it can be seen
from Table 14 that under CFC Grants (13th and 14th Finance Commission Grants)
constitutes the main source of the transfers from the Central Government to
110 Indian Journal of Public Administration 68(1)

Table 13. Transfers to PRIs under various Schemes of the State Government.
(` in Crores)
Years
Transfer
under 2014–2015 2015–2016 2016–2017 2017–2018 Total
State Actual Actual Actual Actual Actual
Schemes BE Release BE Release BE Release BE Release BE Release
Transfer 8.94 8.94 8.33 8.33 2.79 2.79 4.18 4.18 24.24 24.24
under
State
Schemes
100.00% 100.00% 100.00% 100% 100.00%
Source: Commissioner of Panchayat Raj, Government of Telangana.

PRIs. Under the head of CFC grants, the PRIs have received Rs.1009.75 Crores
from 13th FC in 2014-15 whereas they have received Rs.2954.82 Crores under
the 14th FC.
The overall scenario of finances of the PRIs in the state reveals that the PRIs
have received funds from mainly three sources: (a) OSR, (b) transfer from state
government, and (c) transfer from central government. A gap between budget
estimates and actual release is also observed in many cases which have affected
the fiscal scenario of the PRIs in the state.
If we examine the total funds flow to PRIs from various sources, it is ascer-
tained that transfer from central government constitutes 57.10% followed by OSR
(22.32%) and transfer from state government which is 20.58% (Table 16).

Summary of Findings
Finances are the key to making PRIs effective, accountable and transparent.
The core services, such as water supply, sanitation, solid waste management,

Table 14. Budget Released Towards All Grants to PRIs from the Central Government
for the Years 2014–2015 to 2017–2018.
(` in Crores)
Sl. Thirteenth Thirteenth Fourteenth BRGF
No. Year FC FC FC BRGF (IAP) RGSA Total
(Special
Area)
1 2014–2015 993.91 14.04 0.00 89.42 107.09 39.92 1,244.38
2 2015–2016 113.91 1.74 580.34 0.00 0.00 1.2 697.19
3 2016–2017 0.00 0.00 908.99 0.00 0.00 26.32 935.31
4 2017–2018 0.00 0.00 928.46 0.00 0.00 11.6 940.06
5 2018–2019 0.00 0.00 537.03 0.00 0.00 0.00 537.03
Total 1,107.82 15.78 2,954.82 89.42 107.09 79.04 4,353.97
Source: Commissioner of Panchayat Raj, Government of Telangana.
Reddy and Mohapatra 111

Table 15. Contribution of Various Sources to Total Funds of PRIs (In %).

Sl.
No. Description (%) 2014–2015 2015–2016 2016–2017 2017–2018 Total
290.25 306.80 411.09 438.16 1,446.30
1 Own revenues
17.36 23.46 23.97 24.54 22.32
2 Transfer 242.55 303.61 369.01 418.57 1,333.74
from state 14.51 23.22 21.51 23.45 20.58
government
3 Transfer 1,139.09 697.19 935.22 928.46 3,699.96
from central 68.13 53.32 54.52 52.01 57.10
government
1,671.89 1,307.60 1,715.32 1,785.19 6,480.00
Grand total
100.00 100.00 100.00 100.00 100.00
Source: The authors.

Table 16. Total Funds Flow to PRIs.

(` in Crores)
Sl. No. Description 2014–2015 2015–2016 2016–2017 2017–2018 Total
1 Own revenues 290.25 306.80 411.09 438.16 1,446.30
2 SFC release 19.60 43.64 4.00 28.20 95.44
3 Transfer 193.16 222.73 192.39 293.76 902.04
from assigned
revenue
4 Grants-in-aid 20.85 28.91 169.83 92.43 312.02
5 Transfer under 8.94 8.33 2.79 4.18 24.24
state schemes
6 Transfer under 1,009.75 695.99 908.90 928.46 3,543.10
central FC
7 Transfer under 129.34 1.20 26.32 0.00 156.86
central schemes
Grand total 1671.89 1307.60 1715.32 1785.19 6480.00
Source: Commissioner of Panchayat Raj, Government of Telangana.

provision of streetlights and so on, that the PRIs are required to provide to the citi-
zens involve huge financial implication. The extent of finances that PRIs receive
at various levels—ZPPs, MPPs and GPs—determine the level basic of services
that they would render to the local communities.

Finances of the State

The status of finances of the state shows that the revenue surplus continues to
exist ever since the formation of the state. Efforts have been made for revenue
augmentation. However, tax/GSDP achieved by the state government is much
lower than the projections made by the Fourteenth Finance Commission. On the
contrary, the fiscal deficit/GSDP of the state government is much higher than
the target set by the Fourteenth Finance Commission, which is a cause of concern.
112 Indian Journal of Public Administration 68(1)

Transfer to the PRIs

The status of the transfer of funds from the centre and state to the PRIs shows that
the dependency of PRIs on central and state governments is considerable.
Although there are unconditional transfers from the centre and state governments,
expenditure by the departments of the government seems to be higher in the form
of either state sector schemes or centrally sponsored schemes. However, since the
state government has taken initiatives and constituted first SFC for which the
award period is 2020–2021 to 2024–2025, so it is expected that this scenario may
improve the fiscal viability of the PRIs and reduce dependency syndrome. As far
as transfers from the state government to the PRIs are concerned, it is revealed
that SFC grants constitute 7.16% whereas transfer from assigned revenue consti-
tutes 67.63%, grants-in-aid constitute 23.39% and transfer under state schemes
constitutes 1.82% of total state transfers.

Per Capita Funds Transfer to PRIs

Table 17 presents the per person per year funds received by PRIs from three key
sources that are: (a) OSR, (b) transfers from state, and (c) from the central
government. Considering the 2011 Census of the state as a base year, it is esti-
mated that the PRIs have received `259.00 from the central government, followed
by `101.05 from OSR and `93.25 from the state government for each person from
2014–2015 to 2017–2018.

Services Provided by PRIs in the State

It was observed through this study that the PRIs are involved in providing basic
services in the rural areas of the state. These are: (a) drinking water supply, (b) sani-
tation, (c) roads, (d) solid and liquid waste management, and (e) streetlight. The
ZPPs and MPPs are also involved in monitoring and supervising various schemes,
programmes and projects of the state and central governments. However, the GPs
have been playing a key role in providing basic services and the ZPPs and MPPs are
in the position of planning, monitoring and transferring funds to the GPs. Therefore,

Table 17. Per Capita (Per Person Per Year) Funds Flow to PRIs from Different Heads.
OSR State Transfer Central Transfer
Sl. Total (in Per Total (in Per Total (in Per
No. Year Crores) Capita (`) Crores) Capita (`) Crores) Capita (`)
1 2014–2015 290.25 81.76 242.55 68.32 1139.09 320.87
2 2015–2016 306.80 85.94 303.61 85.04 697.19 195.29
3 2016–2017 411.09 114.83 369.01 103.08 935.22 261.23
4 2017–2018 438.16 122.05 418.57 116.59 928.46 258.62
Average 361.58 101.14 333.44 93.25 924.99 259.00
Source: The authors.
Note: Population growth is worked out @ 1.35% per year (the base year being 2011 Census
population figures).
Reddy and Mohapatra 113

this study suggests for the devolution of more funds to the GPs considering their
existing role in the matters of service delivery.

Way Forward
From the foregoing analysis of various factors that dealt with state finances and
its sources (patterns and trends showing the last five years) and scenario of the
finances of the PRIs in the state, this study offers few suggestions for improving
the finances of the PRIs in the state.

Own Revenues of the PRIs Needs to Be Strengthened

It was observed that tax and non-tax revenues have become two main sources
of own revenues of the PRIs, in particular GPs of the state. In some cases, fees
have also been collected by the PRIs from various sources. However, the
PRIs, in particular GPs, have faced few challenges such as (a) shortage of
manpower, and (b) lack of cooperation of people while collecting various
taxes and fees. In this connection, it is suggested that more items/subjects
should be included under this category and, where there is a possibility of col-
lection of fees from any source, the PRIs should do this without waiting for
government order/approval.

Allocation of Finances to the PRIs from net SOTR and

Principles of Devolution
Financial assistance being provided to the PRIs in the state in the form of assigned
revenue, revenue transfer from the state government and grants-in-aid has helped
the PRIs in many ways. It is recommended that these grants should be based on
population for performing their core functions. It is suggested that a share of 10%
from net SOTR (`103,985.70 crore) need to be allocated to the rural local bodies
based on population criteria.

Transfer of Funds Under CFC and Central Schemes

At present, the GPs only have been receiving funds under the Fourteenth CFC.
Further, many central government schemes and programmes like Mahatma
Gandhi National Rural Employment Guarantee Scheme (MGNREGS) are being
implemented in the state by the line departments. All these issues should be
addressed effectively to strengthen the financial position of the PRIs.

Priority for Utilisation of Funds by the PRIs

While utilising funds devolved by SFC to the PRIs, the PRIs, in particular GPs,
should give priority to certain key basic services such as (a) drinking water supply,
(b) roads, (c) sanitation, and (d) solid and liquid waste management.
114 Indian Journal of Public Administration 68(1)

Infrastructure of the PRIs Needs to Be Improved

It is observed through this study that in many cases the own infrastructure of the
PRIs, in particular the GPs, such as office building, computer, electricity connec-
tion, meeting and training halls, staff quarters and so on, are in poor condition
which has resulted in an ineffective functioning of these institutions in the state. It
is, therefore, necessary that special financial assistance should be provided to the
GPs/PRIs for improving their infrastructures.

Conclusion
The article highlights the finances of the PRIs in the state and the flow of funds to
these bodies during various periods from various sources. The main issue observed
in this case is that the PRIs have become instrumental in delivering goods and ser-
vices in rural areas of the state and the formal rules like the 73rd Amendment Act
and the Telangana Panchayati Raj Act, 2018 have in many ways improved their
efficacy as institutions of self-government. Constitution of the first SFC in the state
in 2015 and working of the SFC has again brought the issues of finance to the fore-
front and motivated scholars to delve into this issue critically. The findings of this
article have uncovered the financial scenario of PRIs and highlighted three impor-
tant issues: (a) fiscal scenario of the state and position of own sources of revenue of
the local bodies, (b) transfer of funds to the PRIs from various sources in the state,
and (c) overall implications of funds transfer of improving the finances of
panchayats.
It is clear that the own revenue of panchayats is quite low and transfer from state
and central governments constitute two key sources of these bodies. However,
despite limited own revenues and delays in getting funds from the governments,
these bodies have been playing an important role in providing goods and services
in rural areas. 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 at this level.

Declaration of Conflicting Interests

The authors declared no potential conflicts of interest with respect to the research, author-
ship and/or publication of this article.

Funding
The authors received no financial support for the research, authorship and/or publication of
this article.

Note
1. The Devolution Index Study was conducted by Ministry of Panchayati Raj in
2015–2016 with the support of Tata Institute of Social Sciences (TISS), Mumbai.
Reddy and Mohapatra 115

References
Bardhan, P. (2002). Decentralization of governance and development. Journal of Economic
Perspectives, 16(4), 185–205. https://doi.org/10.1257/089533002320951037
CAG. (2017). Audit Report on State Finances for the year ended March 2016. Government
of Telangana Report no. 3.
Jena, P.R., & Gupta, M. (2008). Revenue efforts of panchayats: Evidence from four states.
Economic and Political Weekly, 43(30), 125–130.
Jha, R., Nagarajan, H.K., & Tagat, A. (2019). Jati, Local goods and village governance:
Private actions and public outcomes. Economic and Political Weekly, 54(49), 43–50.
Jha, S. (2002). Strengthening local governments: Rural fiscal decentralisation in India.
Economic and Political Weekly, 37(26), 2611–2623.
Ministry of Panchayati Raj. (2015–2016). Devolution to panchayats in India: Ranking
functional environment at sub-national level, empirical assessment, 2015–2016.
Government of India. http://www.panchayat.gov.in
Sahasranaman, A. (2012). Panchayat finances and the need for devolutions from the state
government. Economic and Political Weekly, 47(4), 73–80.