Financing Public Infrastructure in Rural India

Gram panchayats in India are independent, constitutional bodies of governance that operate at the level closest to the people or the grass-roots. They are constitutionally vested with powers and responsibilities to foster economic development and social justice. The statutory functions of gram panchayats, as defined by the Tamil Nadu Panchayati Raj Institutions (PRI) Act, include the provision and maintenance of public infrastructure for services such as water supply, public hygiene, garbage disposal, roads, street lights and rural housing among others. IFMR Finance Foundation’s ‘Financing Rural Infrastructure’ initiative aims to gain a deeper understanding of gram panchayats, their responsibilities, their financial wherewithal, their ability to attract debt to finance public infrastructure, and use insights gained from these explorations to design financing programs for rural infrastructure provision.

IFMR Finance Foundation conducted an analysis of three villages – Karambayam, Nattuchalai and Alakkudi in Thanjavur district to better gauge the state of public infrastructure in these villages, the financial status of the gram panchayats, their investments in public infrastructure and how these investments have been financed. The initiative also explored alternative funding channels and how these can be exploited to enhance infrastructure development and delivery of services in the three villages.

In order to perform its statutory duties, the PRI act provides for a number of levers of financing that are available to gram panchayats-

• Own revenues – These are taxes and levies like house tax, professional tax and water charges that a gram panchayat is empowered to levy.
• Assigned Revenues – Assigned revenues are revenues directly due to the gram panchayat, but are collected by the state government and remitted to panchayats once every six months.
• Devolved Revenues – Devolved revenues are direct grants from the state governments to panchayats based on the recommendations of the State Finance Commission (SFC). These revenues are transferred to panchayats on a monthly basis.
• Loans – The TN Panchayati Raj Act empowers panchayats to access loans for the purposes of infrastructure development and service delivery. However, it does not appear that any gram panchayat in India has used this power.
• Scheme based financing – Panchayats also have access to funds from central and state government schemes, but these tend to be tied funds that are to be used for a specific purpose. Examples of scheme based (tied) funds include the National Rural Employment Guarantee Scheme (NREGS) and the Indira Avas Yojana (IAY).

IFMR Finance Foundation’s analysis revealed that panchayat incomes are largely dependent on SFC devolutions (up to 80% of overall revenues), which to a large extent are predictable and timely.

All panchayats seem to suffer from poor collections in their own revenues base, especially house tax and water charges. The issues underlying under-collection and non-collection of revenues are manifold- lack of incentive to pay water charges, poor auditing mechanisms, lack of up-to-date housing survey information and the thin structure of panchayat staffing. In addition to these efficiency considerations, there is also the overhanging problem of low tax rates and charges.

On the expenditure front, water supply infrastructure and roads and street light maintenance forms a substantial portion of panchayats’ budgets. One of things to note is that sanitation and waste disposal are major concern areas in all panchayats, but there is no substantial investment in solutions to these problems. Of the three villages, only Alakkudi has a drainage system and even this is an open drainage system that is choked with garbage, rendering it useless. Maintenance of infrastructure assets is an area of grave concern.

Therefore, there is substantial room to improve the performance of panchayats in terms of own revenues generation and collection. The predictability of the devolved revenues, in addition to a well functioning own revenues base, can be a powerful mechanism to drive planned infrastructure provision.

The fundamental set of reforms that is required for the effective functioning of panchayats and that will enable the entry of debt to finance infrastructure are listed below –

(i)    Computerising of financial statements of the panchayat
(ii)    A regular physical survey of houses in the panchayat domain, once every 5 years
(iii)    SFC to recommend upper and lower bounds for house tax rates every five years with all panchayats required to set their own rates within this band
(iv)    The need for a ‘panchayat service’ cadre of officers to improve the capacities of a panchayat.

The initiative also analysed in detail the risks involved in the provision of debt to panchayats: operational, credit and political risks. Local financial institutions that have physical presence in villages are very well placed to mitigate almost all of these risks. This puts them in a position to participate as debt providers to the panchayat in financing local public infrastructure projects.

Using the insights gained from their analysis, IFMR Finance Foundation has come up with a few financing programs which are being piloted currently:

a) Sanitation Finance – provision of a loan from a local financial institution to household for the construction of a toilet. Households can build the toilet and access the grant available to them through the Total Sanitation Campaign. The one-year loan is repaid by the household on a monthly basis

b) Rural Housing Finance – a loan is provided to households who have been chosen under central and state government housing schemes. This loan can be used by clients both a bridge financing to enable them to access the tranches of grants under government schemes (and repay the loan) or as additional financing, that they can use over and above the grants available to them. Households can then repay the loan over three years or choose to pre-pay at any time prior.

These programs are designed to be easily replicable so that they can be taken to scale by rural financial institutions across India.