Funds to panchayats drying up, warns Parliamentary panel

A parliamentary committee has delivered a stark warning over the sharp decline in financial support to Panchayati Raj Institutions (PRIs), flagging it as a threat to the core of India’s decentralised governance model. In a scathing report tabled in the Lok Sabha, the panel called for urgent fiscal reforms and stronger accountability mechanisms to revive the credibility and capacity of village-level bodies.

The Standing Committee on Rural Development and Panchayati Raj, chaired by Congress MP Saptagiri Sankar Ulaka, expressed concern over the steady erosion of funds to PRIs across successive Union Budgets. This trend, the report said, not only chokes local development but also “undermines the very foundation of fiscal decentralisation” promised under the 73rd Constitutional Amendment.

“In the absence of predictable and adequate financial support, panchayats are struggling to discharge essential functions related to basic services, infrastructure, livelihoods and welfare schemes,” the report noted. The committee has urged the Ministry of Panchayati Raj (MoPR) to immediately engage with the Ministry of Finance and the 15th Finance Commission to reverse this alarming trajectory.

The committee has pressed for a renewed focus on untied and performance-linked grants, pointing out that without these, PRIs cannot respond to local needs effectively. It also recommended that mechanisms be established to ring-fence PRI funds, shielding them from diversion by state-level departments and enhancing transparency in fiscal transfers between governance tiers.

One key recommendation includes the rebalancing of ‘Tied’ and ‘Untied’ grants, advocating for greater flexibility in fund utilisation. The report stressed that once saturation is reached in one service area, unused funds must be swiftly reallocated to other pressing priorities, thus improving overall development outcomes.

In what it termed a major institutional lapse, the panel criticised many states for failing to regularly constitute their State Finance Commissions (SFCs), a constitutional mechanism critical for devolving state finances to PRIs.

Out of all Indian states, only 25 have constituted SFCs and just nine have set up the 6th SFC, as per MoPR data cited in the report. “It is disheartening to note that some states have not even constituted the 3rd, 4th, or 5th SFC,” the committee said.

While states like Punjab and Tamil Nadu were lauded for full compliance, including report submission and action-taken reports (ATRs), others like Arunachal Pradesh and Chhattisgarh were pulled up for delays or pending submissions. Meanwhile, Gujarat, Jharkhand and Telangana are still in the early stages, with SFC reports yet to be submitted.

The committee has asked the MoPR to escalate this issue at the highest political levels and “impress upon state governments” to ensure timely and regular constitution of SFCs. It also recommended the introduction of a uniform, simplified reporting format and capacity-building programmes for SFC members and panchayat officials.

Another key concern flagged was the ineffectiveness of District Planning Committees (DPCs) in coordinating decentralised planning and ensuring community-driven development. The report recommends that the Centre, in collaboration with State Planning Departments and NITI Aayog, develop a model framework for participatory district planning. This would include digital tools, timelines, and standard formats to ensure proper plan submission and review.

Further, the committee proposed that a portion of Central and state scheme funds be tied to DPC-vetted plans, to improve convergence, transparency and grassroots accountability.