Decentralization Community

Solution
Exchange
Community
Consolidated Reply

for

the

Decentralization

Role of State Finance Commission in strengthening the

finances of panchayats and urban local bodies- Examples and
Experiences
Compiled by Naveen Das, Resource Person and Aditi Malhotra, Research Associate
Issue Date: 24 July 2014

From A.N.P Sinha, Chairman; 5th State Finance Commission, Bihar

Posted 10 March 29014
The Government of Bihar has constituted 5th State Finance Commission (SFC) as per the
provision of article 243(I) and 234 (Y) of Indian Constitution, Bihar Municipal Act-2007 and Bihar
Panchayti Raj Act-2006. The main function of SFC is to analyse the financial position of local
governance institutions and recommend principles for vertical and horizontal devolution of taxes
and financial resources to these bodies.
The terms of reference of SFC include recommending:
a. Principles for
the distribution between the State and the Panchayats and Urban Local bodies
(ULBs) of the net proceeds of the taxes, duties, tolls and fees leviable by the State,
which may be divided between them and the Panchayats and ULBs at all levels;
the determination of the taxes, duties, tolls and fees which may be assigned to, or
appropriated by, the Panchayats and ULBs;
the grants-in-aid to the Panchayats and ULBs from the Consolidated Fund of the
State;
b. Measures needed to improve the financial position of the Panchayats and ULBs;
c. Basis for its recommendation and provide estimates for receipts and expenditure of
Panchayats and municipalities in the state.
Given the wide and varied experience, you are requested to provide your insights and inputs on
the following:

What are the methodologies and incentives that need to be incorporated to

improve and raise the revenue (tax and non-tax) of panchayats, ULBs and the
state government?
What are the various tapped and untapped tax potentials of local bodies,
with particular emphasis on property tax?
What procedure needs to be followed for review and forecast of revenue and
expenditure?

Members may also share any relevant national and international best practices on the above
mentioned questions that they are aware of.
The valuable inputs of the Members will help SFC in framing its recommendation to the state
government of Bihar for effective and efficient functioning of the local governance institutions.

Responses were received, with thanks, from

1.
2.
3.
4.

PK Chaubey, IIPA, New Delhi

Venkatrao Y Ghorpade, Nature Greentech Sai Foundation, Bengaluru
Vinod Vyasulu, Centre for Budget and Policy Studies, Bangalore
Ajay Kumar, Bihar Technical Assistance Support Team (B-TAST), Patna, Response
1, Response 2
5. Anand P Gupta, Economic Management Institute, New Delhi
6. Ravishwar Sinha, Independent Consultant, Patna
7. Dhirendra Krishna, Retried Officer Indian Audit and Accounts, New Delhi
8. Alok Bhaumik, Rabindra Bharati University, Kolkata
9. Pradeep Sharma, Fortious Technologies, Noida
10. BP Syam Roy, Independent Consultant, West Bengal, Response 1 and Response 2
11. NC Saxena, New Delhi
12. Nelson J, KILA, Kerala
13. Shashank Deshpande, Ground Water Survey & Development Agency (GSDA),
Maharashtra*

*Offline Contribution
Further contributions are welcome!

Summary of Responses
Comparative Experiences
Related Resources
Responses in Full
Summary of Responses
Discussants reiterated that State Finance Commission (SFC) is a mechanism to nourish the
sustainability of local self-government and shape the destiny of rural and urban governance by
the Panchayats and Municipalities, as per Article 243I and Article 243Y respectively. Members
shared some very useful documents like presentations, reports, studies, papers, web links which
detailed out scope for improving the finances of the panchayats and municipalities.

Discussants suggested that the devolution of funds should be encouraged and be linked to local
needs and status of the society with a developmental weightage for the lesser/poorly developed
areas and communities. Presently, the gap between lesser developed states and developed states
is deepening with time. Developed states are ahead because of their better capabilities and are
able to demand for and utilize the funds better than others and the lesser developed states often
lose out on this front. In view of this, the members suggested that the efficiency and
effectiveness of the expenditure of local government institutions may be examined by the Bihar
State Finance Commission. Members also suggested that the practice of promoting, recognizing
and rewarding local initiatives needs to be built into the system. Success should be replicated and
lessons learnt from those that were not so successful be studied for further improvements.
Interaction at different levels to identify needs should be undertaken. The district and sub district
planning and implementation bodies need to be strengthened and surveillance by community
facilitated.
Members were of the opinion that a government must have power to tax (levy, collect and
appropriate) economic activities with no encumbrances. If necessary from the angle of
uniformity, levy part may remain with state government but collection and appropriation should
be with local government. Grants should be supplementary in nature. Local Government (LG)
would be held accountable by local people only when they directly contribute to the LGs
revenue. Neither panchs nor electorate think that Panchayats are accountable to people. They
think they are accountable to the State department which gives them money. To move towards
true devolution with adequate empowerment of local bodies, discussants suggested that we
should set a target of devolving 30 percent of State's budget to Panchayats and Urban Local
Bodies, and of that fund thus devolved, 20 percent should be untied, allowing local bodies to
undertake their own planning based on local demand. Capacity and innovation of the community
should be utilized to raise funds locally addressing local needs. For example, MGNREGA funds
could be used to develop a common market yard for the local produce or a bridge and revenues
generated locally from this, may support the water, health or ICDS projects or develop SHGs or
whatever community thinks necessary. Decentralized planning, implementation should be
encouragement to meet local repairs in a school, sub centre, aganwadi centre, road using local
resources and initiative. The commission could consider a Coupon System to recognize and
reward the community. This could enable a community to do some more things they want to,
thus encourage cyclic action beneficial to the community.
Members highlighted some of the good initiatives like Mission Manav Vikas, Dus Ka Dum, etc.
taken by the Government of Bihar particularly in term of inclusive development. Such initiatives
are moving in a progressive manner to promote inclusive, responsive and accountable Panchayati
Raj Institutions in the state. Keeping that point in mind, the policy level dialogues may be
initiated by State Finance Commission with Government of Bihar to dovetail these with the core
functioning of Panchayat in the state. To substantiate this, one of the member shared an
example of Odanthurai Panchayat of Coimbatore District of Tamil Nadu where in the panchayat
installed a wind turbine (350 KV capacities) in collaboration with SUZLON technology. To meet
the project cost, the panchayat has borrowed a loan of Rs. 1.15 crore @ 8% pm, and rest of the
amount i.e. 0.4 crore are generated from panchayat contribution. To reduce the risk for repaying
the EMI instalment, the panchayat has sold half of the production to Electricity Board @ Rs.
2.75/- per unit. The rest of the electricity is used for panchayats own consumption like running
of Bio-gasifer, mineral water plant, pump house operation, etc. Presently, the panchayat has
earned approximately Rs.16 lakhs after deducting the operating and management cost. A
panchayat taking such a step forward in the field of technology is indeed praise-worthy. Members
also identified various reasons which hamper the transfer of funds to panchayats with specific
focus on; untied grants, inadequate financial systems and audit of Panchayats. Addressing these
factors will definitely improve the devolution of funds to the panchayats as well as raising their
revenues. Giving the example of the Kerala, members shared that the status of the financial

position of local government improved drastically after the implementation of the

recommendations of the second State Finance Commission, Kerala. Second SFC Kerala brought
the sharing of funds from state government to local government under three heads and out of
the total non-tax collection of the state government, 9% was distributed to local government
under the identified three main category following certain criteria.
Members informed that there many reports of SFCs available which are different in their
approach, time frame, methodology etc. The reports have categorized the recommendations of
SFCs into: global sharing of revenue from state to local; assignment of taxes to local
governments, grants-in-aid from state to local governments and others (relates to improving
administration of the State related to Panchayats and Municipalities) These can be a good
reference point for the fifth SFC of Bihar. One of the members shared a model for improving the
panchayat revenue by collection of property tax without increasing the rates and making any
structural alteration of the basis of levy.
Members suggested that the determination of the taxes, duties, tolls and fees which may be
assigned to or appropriated by the Panchayats/Municipalities is one of the important tasks of the
SFC. In awarding such fiscal decentralization the SFC has to look into fiscal powers of the State
Government as enumerated under the Seventh Schedule of the Constitution and the statutory
fiscal powers at the levels of tiers of Panchayats/Municipalities. The SFC has to keep in upfront
the need of emerging and expanding roles and responsibilities of the tiers of
Panchayats/Municipalities and requirement of commensurate adequate own resources. The SFC
has also to give adequate consideration to the status of current legislative empowerment and the
efficacy of the system. Citing the example of Maharashtra, one of the discussants informed that
Maharashtra is one of the few States in the country to accept groundwater as a common pool
resource for the entire panchayat For this, a legislation named Maharashtra Groundwater
(Development and Management) Act has been enacted in 2009. With this, the Panchayat/Local
Bodies have been empowered to implement this act and most of the powers are with the
watershed committee/Gram panchayat on management of the groundwater. Similarly the fees
collected for different purposes shall be passed on to the concerned Gram panchayat for the
village development activities.
Discussants suggested that to review the forecast and performance of local bodies, there must
be in place a qualitative measure of HDI (Human Development Index) at the village level. This
will help us to assess the improvement in the quality of life of each and every household in the
village. Accordingly, the State government and the DPCs can fine tune the flow of funds to that
particular village. As a matter of fact, the Government of India, during the tenth five year plan
period, had developed a model having 13 cardinal parameters to measure the quality of life of
every household in a given village; the same parameters could also be used to arrive at BPL
families in the village, and the funds could be suitably earmarked to address the needs of these
BPL families. Similarly the Human development index could be basis to transfer funds in different
parts of the state suggested one of the members.
Discussants identified certain challenges in strengthening the financial positions of the
panchayats and urban local bodies in the current scenario. It was highlighted that there are a
number of programs being run by direct funding from center at the district and sub district levels
and also some very special programs targeting different community groups are also being
announced from time to time. However, Bihar in particular has poor access to and utilization for
the said programs/funds particularly the health and family welfare programs. The 5th State
Finance Commission, can suggest mechanisms to enhance access to such funds to the
community. Most of the basic challenges that ULBs and civic bodies are facing are due to growth
of urban population in India. The lack of financial independence by panchayat has also been
identified as policy and institutional barrier to their empowerment and functions of local

governments. Members also mentioned that the funding for expenditure for development must
be 'demand driven' and not 'supply driven' as it is today.
Discussants came up with certain sets of recommendations for the State Finance Commission,
Bihar. They are of the opinion that the Centrally Sponsored Scheme (CSS) should focus on
capacity building at the grassroots and provide support to Gram Panchayats to fulfil their
constitutional responsibilities. To avoid excessive centralization, central government should
withdraw from activities that are not in their domain according to the Constitution of India. For
example, public health is in the domain of State Government and Panchayats, however the role
of central government in National Rural Health Mission need to be reviewed. Members suggested
that to promote financial independence of the local governments, the state government can also
give guarantee to the financial institutions from which the local governments borrow funds for
meeting the expenditure of certain general development schemes. Members were of the opinion
that since resources position and/or devolved items could vary from one period of time to
another, recommendations of any particular SFC for fund transfer would naturally be different.
Hence the Commission has to be specific in its recommendations that for devolved
responsibilities, the Panchayats/Municipalities are entitled to claim such proceeds of the state
resources as a matter of constitutional right to discharge constitutional obligations as empowered
by the State Government under State legislation.
Active involvement of people helps improve resource allocation and service provision by bringing
decision making process closer to the citizens. Participatory planning is part of the
decentralization process and it aims to identify the critical problems, joint priorities, elaboration
and adoption of a socioeconomic development strategies. This initiatives may help generate the
we feeling among the community. The infrastructure created by panchayat helps generate
revenues for Panchayat. It also leads to development of a just and egalitarian society for
strengthening the institutional process to meet the demand of the villagers in a sustainable
manner. Members opined that the present climate of dynamism in the state and the openness of
the Commission reflect the positivity, which surely will bring forth development in the State.

Comparative Experiences
Tamil Nadu
Generating revenue through SHGs, Odanthurai (From Ajay Kumar, Bihar Technical
Assistance Support Team (B-TAST), Patna)
Odanthurai Panchayat of Coimbatore District has generated the revenue through SHGs.
Odanthurai is a model village created with government-led infrastructure. The core objective of
these initiatives taken by Tamil Nadu Government is to strengthen the democratic
decentralization process and devolution to ensure rapid socio-economic progress. This initiative
would also help us increase the stake of the community in the overall process of planning for
optimum utilization of resource.

Related Resources
Recommended Documentation
Improving the Efficiency and Effectiveness of Public Expenditures in India: How
Tracking of Public Expenditures Can Help (From Anand P Gupta, Economic Management
Institute, New Delhi)
Presentation, Anand P Gupta, Economic Management Institute, New Delhi

Available at:
ftp://ftp.solutionexchange.net.in/public/decn/resource/ResearchImprovingtheefficiencyanddevelo
pmenteffectivenessofpublicexpendituresinIndia.pdf

The focus of this presentation is on institutional arrangements for efficient and effective
use of resources by the implementing agencies.

Report of the Committee on Restructuring of Centrally Sponsored Schemes (CSS)

(From Dhirendra Krishna, Retired Officer of the Indian Audit and Accounts Service, New Delhi)
Report, Planning Commission, BK Chaturvedi
Available at: http://planningcommission.nic.in/reports/genrep/index.php?repts=report_css.htm

This report suggests restructuring of CSS schemes to enhance its flexibility and
efficiency. The report was submitted in March 2011.

Suggestions for the Fourth State Finance Commission, West Bengal (From Alok
Bhaumik, Rabindra Bharati University, Kolkata)
Recommendations, Alok Bhaumik for the West Bengal State Finance Commission
Available at:
ftp://ftp.solutionexchange.net.in/public/decn/resource/SFC_4th-SuggestionsAlokBahumik.pdf

In this document the author has shared recommendations with the West Bengal State
Finance Commission led by Prof. Avirup Sarkar.

From Pradeep Sharma, Fortious Technologies, Noida

The Role of state Finance Commissions in fiscal Decentralization in India
Article, VN Alok, 2008 in M A Oommen (ed) Fiscal Decentralization to Local Governments in India,
Newcastle upon Tyne, Cambridge Scholars Publishing.

Restricted access

A Capsule of major State Finance Commission Recommendation in India

Article, VN Alok, 2004 in Indian Journal of Public Administration 50(3): 905-962

Restricted access
This article recommends that SFCs consider global sharing of revenue from state to local,
assignment of taxes to local governments and grants-in-aid from state to local
governments.
From NC Saxena, Independent Consultant, New Delhi
Peoples Empowerment through Democratic Decentralization in India
Paper, NC Saxena
Available here:
ftp://ftp.solutionexchange.net.in/public/decn/resource/PeoplesParticipationThroughDemocraticDe
centralization.pdf

This paper examines the impediments in functioning of panchayats. The focus being that lack
of financial independence by panchayat is a policy and institutional barrier to their
empowerment and functions.

Municipal Finances
Paper, NC Saxena
Available here:
ftp://ftp.solutionexchange.net.in/public/decn/resource/Municipal%20FinancesNCS.pdf

This paper covers the basic challenges that ULBs and civic bodies are facing due to
growth of urban population in India. It also gives an overview of the endogenous and
exogenous reasons for under spending by the ULBs.

The Urban Poor in India

Paper and Presentation, NC Saxena
Paper available here:
ftp://ftp.solutionexchange.net.in/public/decn/resource/UrbanPoor2013_NCS.pdf
Presentation available here:
ftp://ftp.solutionexchange.net.in/public/decn/resource/UrbanPoor2013_NCS.pdf

This paper talks about the urban poverty and tries to relate it with increase in urban slum
population, growth in peri-urban areas and migration. The paper also gives an overview
of growth of population of Indian towns over the last four decades.

Maharashtra Groundwater (Development and Management) Act (From Shashank

Deshpande, Ground Water Survey & Development Agency (GSDA), Maharashtra)
Act
Available at:
ftp://ftp.solutionexchange.net.in/public/decn/resource/MaharashtraGroundwater(DevelopmentMa
nagement)Act%202009XXVIof%202013English.pdf

Maharashtra has accepted groundwater as a common pool resource for the entire
panchayat. The act facilitate and ensure sustainable, equitable and adequate supply of
ground water of prescribed quality, for various categories of users, through supply and
demand management measures, protecting public drinking water sources .

Eleventh Schedule (From Dhirendra Krishna, Retired Officer of the Indian Audit and Accounts
Service, New Delhi)
Constitutional Provision
Available at: ftp://ftp.solutionexchange.net.in/public/decn/resource/EleventhSchedule.pdf

The Constitution of India envisages power and authority of Panchayats in activities listed
in Eleventh Schedule which can be read for guidelines.

From Resource Team

Model Accounting System for Panchayats (Formats, Guidelines and List of Codes)
Guidelines; Comptroller and Auditor General of India and Ministry of Panchayati Raj, Govt. of
India
Available at: http://www.rajpanchayat.gov.in/common/panchayat_model_accounting_system.pdf

The document lays down guidelines and prescribes simple but robust accounting system
for PRIs, comprehensible to the elected representatives and functionaries of PRIs and
facilitates generation of financial reports through Information and Communication
Technology.

Kerala Panchayat Finance

Reference document
Available at:
http://shodhganga.inflibnet.ac.in/bitstream/10603/6656/10/10_chapter%203.pdf

This paper discusses the trends, structure and challenges of Kerala panchayat finance.

Finances and Accounts of Panchayati Raj Institutions in Gujarat

Reference document
Available at: http://cag.nic.in/html/LB/gujarat06-07/chap_1.pdf

This document gives an overview of the panchayat structure in Gujarat and suggests
means to increase accountability in case of revenue generation.

Mobilisation and Management of Financial Resources by Panchayati Raj Institutions:

A Study of Haryana State
Study Report, Mahi Pal
Available at: http://planningcommission.nic.in/reports/sereport/ser/stdy_mmfr.pdf

The present study has been conducted for Haryana with the purpose to streamline the
financial system of the Panchayats so that they can fulfill the expectation and inspirations
of the villagers.

Study of Panchayat Finances in Karnataka

Report; Institute for Development and Empowerment, Mysore
Available at:
http://www.rdpr.kar.nic.in/document/Study%20of%20Panchayat%20Finances%20in%20Karnata
ka.pdf

The principal aim of the study is to assess the fiscal performance of PRIs in Karnataka
over a period of four financial years starting from 2005-06.

Panchayat Finances and the Need for Devolutions from the State Government
Article, Economic & Political Weekly EPW January 28, 2012, Vol. XLVII no. 4 by Anand
Sahasranaman, IFMR Trust, Chennai
Available at: http://www.ifmr.co.in/blog/wp-content/uploads/2012/01/EPW-Panchayat-FinancesFinal.pdf

Based on an analysis of three villages in Tamil Nadu, this paper argues that many gram
panchayats are today in a position to substantially finance themselves and build a culture
of self-sufficiency, independence and accountability to their citizens, reducing their
dependence on devolutions from state governments

Gram Panchayat Finance in Andhra Pradesh

Study Report; Centre for Good Governance
Available at:
http://www.cgg.gov.in/publicationdownloads2a/Grama%20Panchayat%20Finances%20in%20AP.
pdf

The study aims to assess the level of financial autonomy of GPs and analyse sources of
revenues and expenditure in Andhra Pradesh.

Report of the Task Force on Strengthening of the Institution of State Finance

Commissions and Related Matters
Available at:
http://www.panchayat.gov.in/documents/10198/0/Final%20Task%20Force%20Report.pdf

To study the present status of SFCs and to make recommendations for their
strengthening to enable them to perform their functions as envisaged in Article 243I of
the Constitution of India

Management of Finance and Accounts at Gram Panchayat Level in Orissa

Report
Available at: http://www.chittabehera.com/PanchayatiRaj/PRIA Manuals/Manual 1- Overview.pdf

This report gives an overview of status and nature of Gram panchayats in Orissa.

Recommended Organizations and Programmes

Bihar Panchayat Strengthening Project (BPSP)
http://www.worldbank.org/projects/P102627/india-bihar-panchayat-strengtheningproject?lang=en

The programme aims to build the capacity of Panchayats to create an enabling

environment for optimum utilization of resources. The project is being implemented
under the banner of Bihar Gram Swaraj Yojna Society (BGSYS) promoted by Panchayat
Raj Department, Government of Bihar.

Related Consolidated Replies

Local
Bodies
and
State
Finance
Commission,
Thiruvananthapuram (Experiences)
Issued on 26 June, 2006 Download PDF (Size: 125 KB)

from

SDC-CapDecK,

The query presents the status of reports of various State Finance Commissions and
actions taken by the state governments on their recommendations.

Strengthening Panchayat Finances- Examples, Experiences, from Sameer Kochhar,

Skoch Development Foundation, Gurgaon
Issued 07 March 2008 Download PDF version (Size: 123 KB)
The query seeks suggestions on strengthening financial systems, improving fund flow,

monitoring and resource mobilization of panchayats through technology.

Resource Mobilization and Tax Collection by Panchayats, from Grameena Padana

Kendram, Karakulam, Thiruvananthapuram (Examples, Experiences)
Issued on 21 August 2006 Download PDF version (Size: 198 KB)

The query details experiences of Panchayats in generating fiscal resources and models of
such efforts alongwith their impact on planning.

Fiscal Responsibility and Funding of Panchayat Programmes, from Mahi Pal, State
Institute of Rural Development, Haryana (Experiences)
Issued 24 June 2007 Download PDF (Size: 114 KB)

The query seeks experiences on trends in states to devolve funds via schemes and SFC
recommendation and the method to devolve funds to PRIs in the FRBM regime.

Responses in Full
PK Chaubey, IIPA, New Delhi
If all three F's are provided, then local bodies become agencies of the state, not governments! If
you tell me a function (a task), give me money and give me a servant, I am at best a manager,
not a government.
A government must have power to tax-- levy, collect and appropriate. So, first is the power to tax
economic activities with no encumbrances. If very necessary from the angle of uniformity, levy
part may remain with government but collection and appropriation should be with local
government. Grants should be supplementary in nature. Local Government (LG) would be held
accountable by local people only when they directly contribute to the LGs revenue. Grants make
the relationship obscure. Neither panchs nor electorate think that Panchayats are accountable to
people. They think they are accountable to the State department which gives them money.
State may or may not have to vacate fiscal space. It will depend on state specifics. All grants to
begin with should be incentives to collection of taxes and property incomes for which they should
be empowered without encumbrances. This will pave the way for self-reliant self-governments at
local level.

Thomas Jefferson said no taxation without representation. I may add representation is

meaningless unless accompanied by resources for meeting expenses on local public goods and
local merit goods.
Please give it a try. May you lead the world in this sphere too as you did in republican form of
government long ago.

Venkatrao Y Ghorpade, Nature Greentech Sai Foundation, Bengaluru

To move towards true devolution with adequate empowerment of local bodies we should set a
target of devolving 30 percent of State's budget to Panchayats and Urban Local Bodies (under
Panchayat Sector), and of that fund thus devolved 20 percent should be untied, allowing the local
bodies to undertake their own planning based on local demand. Funding of expenditure for
development must be 'Demand driven' and not 'Supply driven' as it is today. Only then District
Planning Committee (DPC) in every district will get activated with real grass-roots level
decentralised planning.
To review the forecast and performance of Local Bodies, we must have in place a qualitative
measure of HDI (Human Development Index) at the village level to assess the improvement in
the quality of life of each and every household in the village. Accordingly, the State govt. and the
DPCs can fine tune the flow of funds to that particular village. As a matter of fact, the Govt. of
India, during the tenth five year plan period, had developed a model having 13 cardinal
parameters to measure the quality of life of every household in a given village; the same
parameters could also be used to arrive at BPL families in the village, and the funds could be
suitably earmarked to address the needs of these BPL families, which will help them to come out
of BPL.

Vinod Vyasulu, Centre for Budget and Policy Studies, Bangalore

I agree with Professor Chaubey. This link may also be interesting in this connection.
http://www.cbps.in/wpcontent/themes/cbps/pdf/Reflections_on_Budgets_Governance_Vyasulu.pdf

Ajay Kumar, Bihar Technical Assistance Support Team (B-TAST), Patna

I would like to share my experience working in World Bank assisted Bihar Panchayat
Strengthening Project (BPSP) in which we are trying to build the capacity of Panchayats to create
an enabling environment for optimum utilization of resources in a meaningful ways. The project
is being implemented under the banner of Bihar Gram Swaraj Yojna Society (BGSYS) promoted
by Panchayat Raj Department, Government of Bihar and its was expected that the society will
groom as Centre of Excellence and leads the process of local self-governance in the State. The
Project Appraisal Document (PAD) may be downloaded from the World Bank site here
http://www.worldbank.org/projects/P102627/india-bihar-panchayat-strengtheningproject?lang=en
The Project Development objective of the proposed five-year project is To strengthen state
capacity to implement decentralized governance reform processes and create effective PRIs. The

project is to be implemented in 6 districts and to accomplish the objectives following components

are envisaged:

Improving PRIs capacity to drive development results through improved implementation

of government anti-poverty & rural development schemes (e.g., NREGS, BRGF, IAY,
ICDS, improving quality of drinking water and sanitation schemes, etc.) and discretionary
development initiatives that are responsive to community needs; and
Improving the policy and administrative environment to enable PRIs function
Panchayat Results Grant and Performance Award
Project management and coordination

Key sub-component of the project in term of enabling environments of better financial

management are as:
i)
Building PRI financial management capacity
The project will support the capacity building of GPs in the area of accounting and financial
management including introduction of PLANPLUS and PRIASOFT (PLANPLUS is GoI designed
software for planning-budgeting & PRIASOFT is GoI software for Accounting).
The project will hire qualified persons for Panchayat accounting to create a dedicated pool of
Panchayat Account Facilitators (PAF) and BIPARD and NIC will be engaged to provide
necessary training to these PAFs who in turn will provide technical support to the GPs/GP
Accountants. The role of Panchayat Account Facilitators (PAFs) would be the following:
a) In the initial phase, help in updating books of accounts of the GPs for first six months
and prepare a consolidated and scheme wise financial statements (sources and uses of
funds) of the GPs.
b) Training and providing hand-holding support to the GP Accountants in maintenance of
books of accounts and preparation of financial reports and statements (to be done in
phased manner and gradually expected to be in place by March 2014 in all 1312 GPs of
six project Districts) on a regular basis for a period of at least 2 years after initiating the
process i.e. GPs taken up under first phase will be supported in all aspects till March 31
2013 and so on for GPs taken up in 2nd & 3rd phase.
c) Assist in the roll out of PLANPLUS and PRIASOFT (in Nalanda and Patna) Districts by way
of ensuring data entry (either in batch mode or off line) and upload in central system on
periodic basis.
The roll out of the computerized planning and accounting software PLANPLUS and PRIASOFT
respectively will be implemented in a phased manner with focus on Patna and Nalanda
districts. The Panchayat Account Facilitators (PAF) will also provide accounting support to
the GPs to update PLANPLUS and PRIASOFT. This would be by way of PAF working out of
block level hubs and periodically (every 15 days) going to the GPs with laptops and data
cards to update the plan-budgets (all sources) and accounts (for all sources and utilization of
funds) in PLANPLUS and PRIASOFT and update the database and generate periodic financial
reports. The preferred approach would be determined by the issues relating to logistics (i.e.
internet connectivity, power and physical infrastructure). Initially both manual books of
accounts and computerized records will be maintained and once the system and processes
are stable, a GP wise protocol of stopping manual books will be considered.
ii)

Setting up the Panchayat Performance Monitoring Unit

The reasons of establishing and operationalizing the process- Panchayat Finance &
Performance Monitoring (with analysis in the Knowledge Management) Unit under BGSYS
are:
Panchayati Raj Department, Rural Development Department and Finance Department have
separate systems of data collection but there is a complete lack of a common system of
information collection, analysis and recommendation making process for assessing and policy
formulation related to capacity building of the PRIs and devolution of funds, functions and
functionaries. BGSYS is to be established to:

Maintain PRI fiscal information system by collecting and compiling data on PRI finances
such as revenue, expenditure, debt etc. covering Zila Parishads, Block Panchayats and
Gram Panchayats. Details could include accounts and details such as devolved and own
revenues, expenditures on wages and other recurrent expenditure, capital expenditure
and deficits. The information will include a description of the different revenue streams
available to PRIs (Plan grants under state and central Plan with listing of
schemes, discretionary grants, incentive grants, own tax and non-tax revenue etc.),
devolved state taxes and revenue sharing arrangements with the state government,
regularity and timeliness of the devolution, backlogs in devolution, if any.
Track funds flow from the state Government to PRIs with a view to study the timeliness,
completeness, adequacy from the point of view of budgeting, planning, preparation and
execution of annual works.
Monitor compliance with Thirteenth Finance Commission and State Finance Commission
conditionality.
Prepare consolidated revenue and expenditure data of panchayats, their audit status,
monitor utilization certificates etc.
Track and collect performance of panchayats under various schemes by collating output
and activities undertaken by Panchayat Raj Institutions.
The unit will identify instances of best practice within the state and outside, evaluate
these, and disseminate them to the Government and sector.
The PRD/Society will maintain a website that will disseminate fiscal and performance
information relating to PRIs in Bihar.
Manage the PRI financial management capacity building component.

iii)
Expand annual audit coverage by involving Local Fund Examiner:
The mandate for audit of GPs rests with the Local Fund Examiner (LFE) which in Bihar
operates under the administrative control of the Principal Accountant General (PAG). Given
the low level of fund flow and devolution of GPs historically, the audit of GPs was not given
priority. This coupled with lack of adequate staff in LFE has resulted in annual audit coverage
of only 500 GPs approx.
Process of roll out:
Coordinate with PAG office to get information and share the objective and process of
hiring agency/recruitment, training and monitoring of Panchayat audit activities including
database on audit.
Sharing with PAG office by formal meetings and report sharing on the capacity building
of panchayats on financial management including audit procedure, IT based accounting
and day to day financial management with handholding support that are complementary
to the functions of PAG office.
Hire experts i.e. retired Auditors (e.g. Retd. IPAI personnel) to support PAG office and
performance of audit of Gram Panchayats (BPSP) at least before performance appraisals.
The experts will visit GPs and complement the activities of the auditors of the PAG
Capacity building of accounting process and reporting to be done by BPSP

Facilitate participation of the ZP, PS, Block, GP functionaries including the members in
the review and capacity building support on the audit process. Involvement of the PRI
members in the process of facilitating audit and capacity building of the PRIs will
enhance the quantity and quality of the audit and financial management process of PRIs.

I strongly feel that this will help to some extent to create an enabling environment in term of
optimum utilization of resource as well as motivating factor to other line departments to devolve
the 3Fs to Panchayat in accordance to the 11th Schedule.

Anand P Gupta, Economic Management Institute, New Delhi

Proper management of public expenditures is a neglected area in public finance and therefore
one issue that the Commission may like to examine is: how efficient and effective are the
Government of Bihar's and local governance institutions' expenditures? I strongly believe that
the Commission's work along these lines will help in identify substantial fiscal resources that can
be used to meet the revenue requirements of local governance institutions in Bihar.
Enclosed is my presentation on "Improving the Efficiency and Effectiveness of Public
Expenditures
in
India:
How
Tracking
of
Public
Expenditures
Can
Help" ftp://ftp.solutionexchange.net.in/public/decn/resource/ResearchImprovingtheefficiencyand
developmenteffectivenessofpublicexpendituresinIndia.pdf
The Commission may like to conduct some empirical work on a couple of major programmes
funded by the Government of Bihar on the lines suggested in this presentation. In case the
Commission would like for me to discuss the issues involved (e.g. articulation of the theories of
change for the GOB programmes that it identifies for the empirical work), I will be happy to do
so.

Ravishwar Sinha, Independent Consultant, Patna

Thank you for the opportunity to contribute towards this very important issue. Adding to the very
useful inputs from the contributors, I would like to offer the following for consideration. Aim
being to correct inequity, meet felt needs and enhance community ownership and enhance
development.

The devolution of funds should encourage and be linked to local needs and status of the
society with a developmental weightage for the lesser/poorly developed areas and
communities. Interaction at different levels to identify needs should be undertaken.
Presently, as we observe on the national fiscal panels, the pleas of the lesser developed
areas/states being pitted against the developed states /areas often lose out. Those that are
ahead because of the better capabilities are able to demand for and utilize the funds better
than others. Thus, the chasm between developed and the developing/underdeveloped keep
deepening. Promoting, recognizing and rewarding local initiatives needs to be built in.
Success should be replicated and lessons learnt from those that are not so successful be
studied for further improvements. There are hardly any failures recognized!!! Perhaps, the
district and sub district planning and implementation bodies need to be strengthened and
surveillance by community facilitated.

There are a number of programs being run by direct funding from centre at the district and
sub district levels and also some very special programs targeting different community groups
are being announced from time to time. My experience is that for various reasons, Bihar in

particular has poor access to and utilization for the said programs/funds. The finance
commission, I am sure can suggest mechanisms to enhance access to such funds to the
community. Health and welfare programs come to mind firstly in this context. There are
programs in other sectors also, that the Commission could look into.

It is often said that there is poor capacity in the state to utilize funds. Enhancing capacity at
all levels should be a priority perhaps linking to funds would be a solution. Different reports
made public show very poor utilization of funds by the year end.

Human development index status in the different parts of the state should be a useful guide
to funds transfer.

Capacity and innovation of the community should be utilized to raise funds locally addressing
local needs should be encouraged. For example, MGNREGA funds could be used to develop a
common market yard for the local produce or a bridge and revenues generated locally to
do add on to water, health or ICDS projects or develop SHGs or whatever they think
necessary?

Decentralized planning and implementation should be encouragement to meet local repairs in

a school, sub centre, ICDS centre, road using local resources and initiative. Awaiting
funds/sanction from state only worsens the situation. Recognition and reward should be built
in. The commission could consider a Coupon System to recognize and reward the
community. This could enable a community to do some more things they want to, thus
encourage cyclic action beneficial to the community. The local bodies in the developed
countries are very important and are masters of the local programs that may devolve or are
raised, with strict controls. The present climate of dynamism in the state and present
openness of the Commission reflects the positivity, which I am sure will bring forth
development in the State.

Dhirendra Krishna, Retired Officer of the Indian Audit and Accounts Service, New
Delhi
There is need for empowering Panchayats to take over the developmental responsibility, instead
of their dependence on the Centrally Sponsored Schemes, by:
Village level planning, with untied funds for requisite flexibility,
Government officials dealing with development work should report to Gram Panchayats,
as in Kerala,
CSS should focus on capacity building at the grassroots and provide support to Gram
Panchayats to fulfil their constitutional responsibilities. Central Government should
withdraw from activities that are not in their domain according to the Constitution of
India, to avoid excessive centralization. For example, public health is in the domain of
State Government and Panchayats, however the role of Central Government in National
Rural Health Mission need to be reviewed,
There is need for restructuring as highlighted in Report of the Committee on
Restructuring of Centrally Sponsored Schemes (CSS)
http://planningcommission.nic.in/reports/genrep/index.php?repts=report_css.htm
Article 243 I of the Constitution of India, envisages Financial Commission to assess the
funding requirement of PRIs. Restructuring of CSS would involve thorough reappraisal by
funds by Finance Commission to review the financial position of the Panchayats. This also
involves treating Panchayats as "local-self -government" by the Finance Commission,
instead of subordinate, to whom powers are delegated by Central and State
Governments, as envisaged in Article 40 the Constitution of India. Finance Commission

should take a holistic view of rural development, suggesting scrapping of CSS, wherever
necessary.
The Constitution of India envisages power and authority of Panchayats in activities listed in
Eleventh Schedule which can be read for guidelines.
See here ftp://ftp.solutionexchange.net.in/public/decn/resource/EleventhSchedule.pdf

Alok K Bhaumik, Rabindra Bharati University, Kolkata

It is very nice to see that we have now some deliberation in the Decentralization Community on
the role of State Finance Commissions. Thanks to Shri A.N.P Sinha, Chairman, SFC, Bihar for
inviting suggestions. Recently, in a workshop I submitted my Memorandum to Professor Avirup
Sarkar, Chairman, 4th SFC, West Bengal. I would like to share the same
ftp://ftp.solutionexchange.net.in/public/decn/resource/SFC_4th-SuggestionsAlokBahumik.pdf with
Shri Sinha and other colleagues in the Community and invite feedback.
I would also request colleagues to share any state-level experiment of institutionalization of
voluntary contributions at the Gram Panchayat level. Once I get such feedback, I will like
to post my own scheme for institutionalization of voluntary contributions at the GP level.

Pradeep Sharma, Fortius Technologies, Noida

State Finance Commission is an important institution which has not acquired the respectability
similar to that of the National Finance Commission. About fifty reports of SFCs are available
which are different in their approach, time frame, methodology etc. It would be good if the fifth
SFC of Bihar refer these reports. A summary of these reports can also be found in the following
sources:
Alok, VN 2008, The Role of state Finance Commissions in fiscal Decentralization in India, in M A
Oommen (ed) Fiscal Decentralization to Local Governments in India, Newcastle upon Tyne,
Cambridge Scholars Publishing.
Alok, VN 2004, A Capsule of major State Finance Commission Recommendation in India, in
Indian Journal of Public Administration 50(3): 905-962
He has

classified all these recommendations of SFCs into the following broad categories:
Global sharing of revenue from state to local
Assignment of taxes to local governments
Grants-in-aid from state to local governments
Others (Related to improving administration of the State related to Panchayats and
Municipalities)

The Chairman, Fifth SFC Bihar could make recommendations on these points which broadly cover
the ToRs of the SFC.

Ajay Kumar, Bihar Technical Assistance Support Team (B-TAST), Patna

In continuation with my earlier response, I would like to highlight the few good initiatives like
Mission Manav Vikas, Dus Ka Dum, etc. taken by the Government of Bihar particularly in term of
inclusive development. The SHGs movement is mushrooming in which Jeevika plays crucial role

for engaging the community particularly for livelihood generation opportunity and holistic
development in general. I feel such initiatives are moving in a progressive manner to promote
inclusive, responsive and accountable Panchayati Raj Institutions in the state. Keeping that point
in mind, the policy level dialogues may be initiated to dovetail these with the core functioning of
Panchayat in the state.
Here, I would like to share my experiences with Odanthurai Panchayat of Coimbatore District of
Tamil Nadu in which they have generated the revenue through SHGs. Odanthurai is a model
village created with government-led infrastructure. The core objective of these initiatives taken
by Tamil Nadu Government is to strengthen the democratic decentralization process and
devolution to ensure rapid socio-economic progress. This initiative would also help us increase
the stake of the community in the overall process of planning for optimum utilization of resource.
The development of infrastructure helps to provides value added services to community along
with creating the revenue generation model to meet the requirement of Panchayat in a
sustainable manner. Few initiatives taken by Panchayat are:
The Odanthurai Panchayat is large panchayat comprising of nine habitations located near the
town of Mettupalayam, on Ooty-Coimbatore road. Odanthurai has progressively embraced
technological development and combined it with viable institutional service delivery models. In
the 1223 families living in 9 hamlets, the average family income is around Rs. 3000 per month.
Yet people live in pucca houses which have been made possible through years of tireless effort
spent by the panchayat to create a hut-less village. The government of Indias innovative rural
housing scheme, the Indira Awas Yojana (IAY), and the Schedule tribes housing scheme were
instrumental in financing the hut-less-village with technical support from the District Rural
Development Agency (DRDA).
I was surprised at the efficiency of panchayat level, where a strong engagement with the
government has provided 100% coverage of services. The efficient and transparent functioning
at the grassroots level has led to building the panchayat corpus.
The federation of women SHGs runs mineral water plant worth 20 lakh (15 lakh is bank loan +
Rs. 5 lakh is subsidy of bank under SGSY scheme) with a capacity of 8000 litres per day. The
payback period of bank loan is 3 years, and the rate of interest is 10.5% pa. The federation has
appointed two professional i.e. microbiologist and chemist for quality maintenance. The salary of
these professionals is met from the profit of business. The project has given employment
opportunity to 48 women, assuring them of a daily wages of Rs. 70/. It was also assessed that,
after repaying the loan amount the individual women will get approximately Rs. 200/- per day as
wages.

Under the rural energy plan implemented by DRDA, two hamlets are lit with solar energy.
The panchayat has installed a biomass gasifer, run by women SHGs to pump out 2.25 lakh
litre of water from Bavani River for the entire village every day and could save 65-70% of
power cost.. The end treatment of pumped water helps to ensure bacteria free supply of
water for consumption purposes. Under the Rajiv Gandhi Drinking Water Mission, water and
biogas plants have been provided to the village. A biomass gas fire unit (said to be the first
of its kind in the country at the panchayat level), was installed in Odanthurai panchayat. With
an installed capacity of 10.5 HP. Rs 1.35 lakh had been given by Union ministry of nonconventional energy sources as grant and Rs 1.75 lakh was contributed by the panchayat.

Another unique achievement of the village is that it has installed a wind turbine (350 KV
capacities) in collaboration with SUZLON technology. The total cost of wind turbine is 1.55
crore. To meet the project cost, the panchayat has borrowed a loan of Rs. 1.15 crore @ 8%
pm, and rest of the amount i.e. 0.4 crore are generated from panchayat contribution. To

reduce the risk for repaying the EMI instalment, the panchayat has sold half of the
production to Electricity Board @ Rs. 2.75/- per unit. The rest of the electricity is used for
own consumption like running of Bio-gasifer, mineral water plant, pump house operation,
etc. Presently, the panchayat has earned approximately Rs. 16 lakhs after deducting the
operating and management cost. A panchayat taking such a step forward in the field of
technology is indeed praise-worthy. Above all, this initiative helps to create the opportunity
for villagers to uplift the socio-economic status of the families in sustainable approach.
The replication of the concept of Gram Swaraj is the basic approach for delivering services for the
betterment of the community. Active involvement of people helps improve resource allocation
and service provision by bringing decision making process closer to the citizens. Participatory
planning is part of the decentralization process and it aims to identify the critical problems, joint
priorities, elaboration and adoption of a socioeconomic development strategies.
Development through rural water harvesting and management, supply of protected drinking
water, promotion of sanitation related habitation and development of sanitation infrastructures,
employment and infrastructure development (SGRY and SGSY schemes), self-reliant through
revenue collection/tax collection, education for all (100% enrolment), emphasis on health, family
welfare and sanitation is the major thrust area for holistic development of the community in
Odanthurai panchayat.
Therefore this initiatives may help generate the we feeling among the community. The
infrastructure created by panchayat helps generate revenues for Panchayat. It also leads to
development of a just and egalitarian society for strengthening the institutional process to meet
the demand of the villagers in a sustainable manner.

BP Syam Roy, Independent Consultant, West Bengal

The institution of State Finance Commission (SFC) is a mechanism to nourish the sustainability of
local self-governments. In order to shape the destiny of rural governance by the Panchayats and
urban governance by the municipalities, as per Article 243I and Article 243Y respectively. While
there could be State wise marginal and periodical variations on some incidental aspects in the
terms of references for the SFC, the Constitution of India enshrines universal terms of reference
under Article 243I and Article 243Y. Those are classified as below:
a) In the case of the Panchayats (243I) the principles which should govern:
i)
the distribution between the State and the Panchayats of the net proceeds of the taxes,
duties, tolls and fees leviable by the State, which may be divided between them under
Part IX of the Constitution and the allocation between the Panchayats at all levels of their
respective shares of such proceeds;
ii)
the determination of the taxes, duties, tolls and fees which may be assigned to, or
appropriated by the Panchayats;
iii)
the grants-in-aid to the Panchayats from the Consolidated Fund of the State;
iv)
the measures needed to improve the financial position of the Panchayats
b) In the case of the Municipalities (Article 243Y) the principles which should govern:
i)
the distribution between the State and the Municipalities of the net proceeds of the
taxes, duties tolls and fees leviable by the State, which may be divided between them
under Part IXA of the Constitution and the allocation between the Municipalities at all
levels of their respective shares of such proceeds;
ii)
the determination of the taxes, duties, tolls and fees which may be assigned to, or
appropriated by, the Municipalities;

iii)
iv)

the grants-in-aid to the Municipalities from the Consolidated Fund of the State;
the measures needed to improve the financial position of the Municipalities.

While it is expected that SFC should address each of the points separately and give its
recommendations accordingly, the most crucial area (also area of most confusion) is on item (i)
of the respective Article 243I and Article 243Y as it addresses the status of devolution of any
particular period. Incidentally, the respective state governments used to administer these
devolved responsibilities under items of the Seventh Schedule of the Constitution (both List-II
and List-III) before the Constitutional Amendments and met expenses out the State resources.
Now, after the Constitutional Amendment, items of the 11th or the 12th Schedule which have
been devolved, by phases or otherwise, as per Article 243G and 243W to the tiers of the
Panchayat or to the Municipalities of the concerned State, are the focused items for the SFC to
address and recommend the amount of the State resources that are needed to be
transferred by the state government to meet the cost of such devolved items in favour of the
Panchayats (tier wise, as devolved) or the Municipalities. The moot point here is that since
resources position and/or devolved items could vary from one period of time to
another, recommendations of any particular SFC for fund transfer would naturally be
different. In other words, the Commission has to be specific in its recommendations
that for devolved responsibilities, the Panchayats/Municipalities are entitled to claim such
proceeds of the state resources as a matter of Constitutional right to discharge Constitutional
obligations as empowered by the State Government under State legislation.
The second important item for the SFC is determination of the taxes, duties, tolls and fees which
may be assigned to, or appropriated by the Panchayats/Municipalities. In awarding such fiscal
decentralization the SFC has to look into fiscal powers of the State Government as enumerated
under the Seventh Schedule of the Constitution and the statutory fiscal powers at the levels of
tiers of Panchayats/Municipalities. The SFC has to keep in upfront the need of emerging and
expanding roles and responsibilities of the tiers of Panchayats/Municipalities and requirement of
commensurate adequate own resources. The SFC has also to take into consideration the spirit of
sub-state fiscal federalism, fiscal decentralization and fiscal autonomy linked with fiscal efficiency.
To this end the SFC has also to give adequate consideration to the status of current legislative
empowerment and the efficacy of the system in the aggregated sense to the different levels
Panchayats and Municipalities as revealed in at least three consecutive reports of Examiner of
Local Accounts (ELA) of office of Accountant General of the State and recommend further fiscal
empowerment, if required at this stage.
The third important point for recommendation relates to Grants-in-aid to the tiers of
Panchayat/Municipalities from the Consolidated Fund of the State. The State Government usually
releases grant-in-aid from the Consolidated Fund of the State to the different tiers of the
Panchayat/Municipalities to meet salaries etc. of the establishments of the
Panchayats/Municipalities at a scale worked out by the Government. Even the periodical revision
of the DA, retirement benefits etc. are often decided by the Government in some states. It is only
expected that Government should not be the primary decision taker any more in this area but,
instead, the SFC would address and give recommendation for its adoption by the government in
future.
Further, for general purpose grant, if any, the SFC needs to devise its own perception of
development indicators separately for each of the tiers of the Panchayat and Municipalities across
the State in terms of livelihood, health, education and other indices of social, economic and
infrastructural parameters and recommend grant-in-aid to meet relative development deficits,
separately for each of the tiers of the Panchayat and also for the Municipalities.

Finally, the SFC has also to address and recommend the measures needed to improve the
financial position of the Panchayats/Municipalities in the state. This is the broader area in which
the SFC would address issues which could not have been looked into under other terms of
reference for improving the financial position of the Panchayats/Municipalities but are now
essential to accommodate generational changes in expectation from such local bodies by its
citizens on good governance and visible outcome.
I would conclude with the expectation that let the institution of SFC need not be converted into
untied fund Commission!

BP Syam Roy, Independent Consultant, West Bengal

Earlier in this platform, I had occasion to discuss on 3Fs in connection with devolution. I wish to
respond once again following PK Chaubeys views:
It is surprising that the use of catchy phrase 3Fs on Devolution has wide acceptance in the
Decentralization Community but it has not furthered the cause of devolution. Let me now spell
out 3Fs, (i) devolution of functions, (ii) devolution of fund and (iii) devolution of functionaries and
understand its implications.
(i) Devolution of functions: The Constitution of India has not defined Devolution. It has accepted
the generic meaning of devolution in that it has to meet three essential requisites for Devolution,
namely, a) functional autonomy in respect of defined subjects for decision taking, b) financial
autonomy on resource raising and c) implementation autonomy on schemes designed by them.
The Constitution of India, while institutionalizing local governance in the country under the 73 rd
and 74th Amendments, adopted this devolution mode and accordingly enshrined ..the devolution
of powers and responsibilities upon Panchayats, at the appropriate level under Article
243G and ..the devolution of powers and responsibilities upon Municipalities under Article
243W. In other words, all tiers of Panchayat would need to have distinct devolved powers and
responsibilities from the Eleventh Schedule, as institutions of self-government. Similarly, the
Municipalities need to have distinct devolved powers and responsibilities from the Twelfth
Schedule, as institutions of self-government.
Such devolution can take place only by law when passed by the Legislature of a State. Neither
the department of the Panchayat nor does the department of any Municipalities of the State
Government has any authority to order devolution of any functional responsibilities. Additionally,
functional items of devolution could be passed by phases depending on the absorbing strength
of further load. Since there cannot exist anything called Concurrent Devolution, functional items
for the devolution for the Panchayat have to be tier-specific.
Finally, devolution is different from assignment. While devolution leads to empowerment through
state legislation, assignment is a task concept of implementation of schemes by the departments
of the state government. The quality of democratic governance in our country depends on our
ability to follow the constitution mandated path of devolution.
(ii) Devolution of funds: The Constitution of India has not used the word devolution of
funds when setting up SFC under Article 243I and Article 243Y. It has instead used the word
distribution between the State and the Municipalities of the net proceeds of the taxes, duties tolls
and fees leviable by the State for implementing devolved responsibilities. Such recommendation
is of a kind of entitlement of fund for implementing constitutional responsibilities.

(iii) Devolution of functionaries: This is an absurd proposition. There can be deputation of

functionaries from the Establishment of the State Government to the tiers of the Panchayat or to
any of the Municipalities of the State. There could as well as be deployment of functionaries
from the Establishment of the State Government to the tiers of the Panchayat or to any or
Municipalities of the State under defined terms. There cannot, however, be anything called
devolution of functionaries. This idea is just not implementable and has generated tremendous
harm in the conceptual domain. As a matter of fact, from a long time perspective, the concerned
local body has to organise its own staff for implementing its devolved responsibilities and the SFC
would need to address this in its recommendations under given terms of reference.

NC Saxena, New Delhi

I would like to share the following documents that I wrote sometime back, as response to the
query:

Peoples Empowerment through Democratic Decentralization in India: This paper

examines the impediments in functioning of panchayats. I suggested therein that lack of
financial independence by panchayat is a policy and institutional barrier to their
empowerment and functions. In the paper, the sub section 4.2- Transfer of funds to PRIs,
under section 4- Overcoming policy barriers to participation and empowerment mentions
various reasons which hampers the transfer of funds to panchayats with specific focus on;
Untied grants, Inadequate financial systems and Audit of Panchayats. Addressing these
factors will definitely improve the devolution of funds to the panchayats.
See here:
ftp://ftp.solutionexchange.net.in/public/decn/resource/PeoplesParticipationThroughDemocrati
cDecentralization.pdf
Municipal taxes: This paper covers the basic challenges that ULBs and Civic bodies are
facing due to growth of urban population in India. It also gives an overview of the
endogenous and exogenous reasons for under spending by the ULBs. The paper talks about
the tremendous scope for improvement in revenue from property tax, even without
increasing rates, and indeed, even without any structural alteration of the basis of levy. It
proposes that the municipalities in India on an urgent basis complete the formal registration
of all properties.
See here:
ftp://ftp.solutionexchange.net.in/public/decn/resource/Municipal%20FinancesNCS.pdf
The Urban Poor in India: This paper talks about the urban poverty and tries to relate it
with increase in urban slum population, growth in peri-urban areas and migration. The paper
also gives an overview of growth of population of Indian Towns over the last four decades.
The sub section 8.6- Poor revenue collection, under section 8- Cross sectoral issues is quite
relevant to the query, as it mentions the reasons for low tax collections by ULBs.
See here: ftp://ftp.solutionexchange.net.in/public/decn/resource/UrbanPoor2013_NCS.pdf. I
am also enclosing a power point presentation titled Urban poor in India which captures the
salient features of the paper
See here: ftp://ftp.solutionexchange.net.in/public/decn/resource/UrbanPoor2013_NCS.pdf

Nelson J, KILA, Kerala

The second State Finance Commission, Kerala under the chairmanship of Prof. Prabhat Patnaik
proposed certain drastic changes in the flow of funds between the state government and the
local governments. Previously there were different kinds of funds flow from the state government
to the local governments under various heads. These funds were collected by the state

government and shared between the local governments and state government on the basis of
certain criteria. The maintenance functions which were transferred to local governments to meet
expenses for day to day activities of local institutions were brought under three categories viz;
Non-road Maintenance, Road Maintenance and General Purpose. The first one is for the
annual maintenance of physical structures of institutions transferred to the local governments,
the second one is for the maintenance of roads transferred to local governments and created by
the local governments and the third one is for meeting the expenses connected with the day
today functions of the institutions which got transferred to the local governments.
This has tremendously improved the financial position of the local governments. Out of the total
non-tax collection of the state government, 9% was distributed to local government under the
above three main category following certain criteria. (five and a half percent for both the road
and non-road maintenance purposes and the balance three and a half percent for traditional
purposes i.e. for general purpose category). Before these institutions were transferred to the
Local Governments, their expenses were met by the departments concerned. eg. primary health
by the Health Department, veterinary services by the Animal Husbandry Department and schools
by the Education Department etc. Now these departments have no responsibility in the day
today activities of these institutions. It is the responsibility of the Local Government concerned.
In Kerala, over and above the own tax and non-tax revenue of the local governments, they are
getting funds from state governments under the following items:

Plan funds:- General sector, Special Component Plan, and Tribal Sub Plan
- World Bank Assistance
- Thirteenth Finance Commission
- Award, Special grants to certain local governments for meeting certain special
purposes entrusted to them
- Funds for filling the gap between own fund and own expenditure etc.

Non-plan:-

Road maintenance fund

Non-road maintenance fund and
General Purpose Grant

All the above funds are given through the State Budget. A separate Budget document is prepared
for this purpose and presented in the State Assembly along with the other budget documents at
the time of budget presentation by the State Finance Minister. As the Assembly passes the
budget, it is a kind of liquid cash as far as the local governments are concerned. This budget
document is called Appendix-iv of the state budget.
The salary portion and the other financial benefits, due to the staff of institutions transferred to
the local governments are also met by the state government. Moreover, the state government
also gives guarantee to the financial institutions from which the local governments borrow funds
for meeting the expenditure of certain general development schemes.

Shashank Deshpande, Ground Water Survey & Development Agency (GSDA),

Maharashtra
I am happy to tell you that, Maharashtra is one of the few States in the country to accept
groundwater as a common pool resource for the entire panchayat. For this, a legislation named
Maharashtra Groundwater (Development and Management) Act - has been enacted after the

assent of Honble President of India in 2009. The act facilitate and ensure sustainable, equitable
and adequate supply of ground water of prescribed quality, for various categories of users,
through supply and demand management measures, protecting public drinking water sources.
With this enactment, the Panchayat/Local Bodies have been empowered to implement this act.
Most of the powers are with the watershed committee/Gram panchayat on management of the
groundwater.
Similarly the fees collected for different purposes shall be passed on to the
concerned Gram panchayat for the village development activities. I would like to share with you a
copy of the enactment also.
You can refer to the act at:
ftp://ftp.solutionexchange.net.in/public/decn/resource/MaharashtraGroundwater(DevelopmentMa
nagement)Act%202009XXVIof%202013English.pdf

Many thanks to all who contributed to this query!

If you have further information to share on this topic, please send it to Solution Exchange for the
Decentralization Community in India at se-decn@solutionexchange-un.net.in with the subject
heading Re: [se-decn] Query: Role of State Finance Commission in strengthening the finances of
panchayats and urban local bodies- Examples and Experiences.
Disclaimer: In posting messages or incorporating these messages into synthesized responses,
the UN accepts no responsibility for their veracity or authenticity. Members intending to use or
transmit the information contained in these messages should be aware that they are relying on
their own judgment.
Copyrighted under Creative Commons License Attribution-NonCommercialShareAlike 2.5. Re-users of this material must cite as their source Solution
Exchange as well as the items recommender, if relevant, and must share any
derivative work with the Solution Exchange Community.
Solution Exchange is a UN initiative for development practitioners in India. For
more information please visit www.solutionexchange-un.net.in