Where Are Panchayats in Fiscal Federalism? The Missing Link

 


Recently, NK Singh, Chairman of the Fifteenth Finance Commission (FFC), raised concerns about the growing political culture of freebies and its impact on the macroeconomic stability of both the Centre and the States. While this is a critical observation, transforming this culture requires more than just central and state-level reforms. True cooperative federalism (CF) must empower citizens from the Ward Sabha to the Lok Sabha. Currently, the discourse on fiscal federalism rarely travels beyond the State level, leaving a massive gap where our Panchayati Raj Institutions (PRIs) should be.


The Current State of Cooperative Federalism

Under Article 243G of the Constitution, state legislatures are empowered to endow panchayats with the authority to function as institutions of self-government, particularly regarding the 29 subjects listed in the Eleventh Schedule.


However, in practice, the spirit of cooperative federalism fails to embrace India’s 2.55 lakh panchayats. At present, we have governments operating at four levels: central, state, rural (panchayats), and urban (municipalities). For governance to truly flourish, resources must be mobilized and coordinated across all these levels for the common good.


Panchayats as Agencies, Not Local Governments

Instead of operating as independent rural local governments, PRIs frequently function merely as implementing agencies for State and Central government schemes. They lack the freedom to decide local priorities.

Even when the Central Finance Commission recommends fund transfers, they are severely restricted:

  • Tied Funds: According to the FFC, 60% of grants disbursed to rural local bodies are tied to specific objectives like drinking water, sanitation, and waste management.
  • The "Untied" Illusion: The remaining 40% is labelled as "untied" but is still restricted to the 29 subjects listed in the 11th Schedule. Without the choice to go beyond these prescribed subjects, these funds are essentially tied as well.

The Proven Impact of Empowered Panchayats

Making PRIs an integral part of cooperative federalism is not just a theoretical ideal; it is a proven poverty-reduction strategy. A 2018 study on Multidimensional Poverty (MDP)—which measures acute poverty based on health, education, and living standards—showed that India's MDP dropped significantly from 55% to 21% between 2006-07 and 2015-16.


This drop was largely driven by five southern states: Kerala, Tamil Nadu, Karnataka, Telangana, and Andhra Pradesh. Crucially, four out of these five states rank highly on the devolution index, meaning they have effectively transferred powers to their panchayats. This proves a direct relationship between strengthening local governance and eradicating poverty. The successful role of PRIs in handling the Covid-19 pandemic further highlights their capability.


The Path Forward: Deepening Fiscal Federalism

To establish true fiscal federalism and integrate panchayats effectively, structural changes are required:

  1. A Dedicated Local List: There is an urgent need to carve out a "Local List" in the existing Seventh Schedule of the Constitution. This should be further divided into three specific lists—for gram panchayats, intermediate panchayats, and district panchayats—ensuring a clear allocation of work.
  2. Interactive Forums: We need dedicated platforms at the state and central levels where PRI representatives can directly interact with MPs and MLAs. Existing examples include the State Council for Panchayats in Gujarat or the Inter-district Council in Haryana.

By taking these steps, we can ensure that Indian villages are not merely implementing bodies, but active, empowered participants in the nation's economic progress.


📌 Key Takeaways

  • The Scope of Federalism: Current discussions on cooperative federalism wrongly exclude Panchayati Raj Institutions (PRIs), focusing only on Centre-State relations.
  • Fund Restrictions: The majority of Central Finance Commission grants to rural bodies are "tied," severely limiting local decision-making and autonomy.
  • Poverty Reduction: States that devolve more power to their panchayats show significantly higher success rates in reducing Multidimensional Poverty (MDP).
  • Constitutional Reform: A dedicated "Local List" in the Seventh Schedule is necessary to clearly define the powers and responsibilities of panchayats at all three levels.


Dr. Mahi Pal

Vice President

Mission 7374 Foundation

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