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Panchayat Finances and the Need for Devolutions from the State Government

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In the current edition of Economic & Political Weekly, Anand Sahasranaman of IFMR Finance Foundation has published a paper on Panchayat Finances based on an analysis of three villages – Pallavapuram, Pandiyapuram and Cholapuram in rural Tamil Nadu. The paper outlines the different aspects concerning their finances and infrastructure and argues that with judicious increases in their tax and fee regimes, all three will be in a position to self-finance a substantial portion of their infrastructure and service needs, resulting in improved local governance and quality of life of local citizens.

Abstract from the paper below:

One of the key tests to real empowerment of panchayats lies in the ability of local self-governing institutions to finance their own expenditures through internal generation of resources. 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. It concludes that by incentivising competition among panchayats and instituting a rural development fund to enable them to access debt capital, the perverse incentives they now face can be mitigated to a large extent, leading to several significant positive outcomes.

To read the full paper click here.

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  1. A well researched work. But, the basic issue remains.  The situation s like which will come first – a chick or an egg. Whether infrastructure like sanitation, roads, water etc., will be provided first by the Panchayat and then create an enabling environment for other developments and activities to take place, or whether by taxing the people (who are already left with little surplus) first and then create developments and provide services later. The very fact that the report has not been able to provide any data on revenue on account of professional taxes and other related areas shows that there are very few institutions in which people are employed to pay such taxes. If the location of the three sample  villages (which district) are given and compared with  the profile of the district it would have given a better picture about the selection of these sample villages. If weighted average was used, it would have given a slightly different picture (weighted average of h/h would be 4.33). Overall, it is a good work.

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