‘Sound Finances’ of the panchayats/municipalities as is a constitutional obligation


The “sound finances” of the panchayats/municipalities is a constitutional obligation enjoined by Article 2431 and 243Y respectively.

Therefore, as an integral part of activity mapping, the quantum of finances that will be made available on a five-year and annual basis to the panchayats/municipalities at each level must be indicated as unambiguously as possible.

On the basis of the experience gathered hitherto, and their respective road maps for effective devolution, states must give urgent attention to letting the elected local bodies know what they might expect by way of tied and untied grants, as well as what resources they are expected to raise on their own.


It has to be considered whether moneys for programmes related to functions devolved in terms of the Eleventh and Twelfth Schedules – estimated at Rs. 31,000 crore per annum, are channeled direct to the panchayats at the appropriate level.

Restructuring of planning and implementation mechanisms and monitoring agencies at the central level may be needed to ensure there is no centralization in the name of decentralization.

Central and centrally-sponsored schemes should be so conceived and executed as to promote and not impede effective devolution and the larger constitutional purposes of elected local bodies functioning as institutions of local self-government.

Moreover, finances devolved to the panchayats/municipalities by the state or central governments must be managed and administered by the elected bodies themselves and not resumed for planning, implementation or expenditure by para-stately bodies or parallel structures. Strict monitoring of Finance Commission grants to the elected local bodies which is a constitutionally mandatory requirement has to be ensured.


State Finance Commission recommendations are recommendatory not mandatory in nature. The State Governments should place the recommendations of the State Finance Commissions before the legislatures with Action Taken Report, and fully implement the recommendations.

State governments may undertake a review of the state of implementation of all accepted recommendations. Consideration may also be given to establishing a standing committee of the state legislature to keep a watch on the “sound finances” of the elected local bodies, particularly with a view to supervising and monitoring the progress in implementing central and state finance commission recommendations.

Elected local bodies cannot function as “institutions of local self-government” until they are endowed with substantial untied funds which they can spend not as directed by the central/state governments but as determined by the panchayats in consultation with gram/ward sabhas.

Moreover, fiscal responsibility will evolve only when local bodies are empowered and obliged to complement grants received by raising their own finances through taxation, particularly forms of taxation which enable the local bodies, in accordance with the provisions of Articles 243H and 243X, to “appropriate” the revenues so raised for their own purposes instead of being obliged to credit them to the consolidated fund. District panchayats and municipalities may also be encouraged and assisted in raising funds through bond issues.


States may, therefore, prepare a road-map for untying as large a proportion of grants to the panchayats/municipalities as possible, and the center may be urged to follow suit. State Finance Commissions may be requested to pay particular attention to augmenting the fiscal self-reliance of the elected local bodies.

The Twelfth Finance Commission may be requested to prepare guidelines for State Finance Commissions to follow so that there is an element of uniformity in the format of recommendations of State Finance Commissions’ Reports.

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