Definition:

• Dependency syndrome refers to a situation where local self-governing(LSG) bodies, like Panchayati Raj institutions, rely heavily on external sources of funding, particularly grants from central and state governments, rather than generating their own revenue through local taxation and other means. 
• Recent report by the Reserve Bank of India on the finances of Panchayati Raj Institutions for 2022-23 says that Panchayats earn only 1% of the revenue through taxes”, with the rest being raised as grants from the State and Centre.
• It specifically points out that 80% of the revenue is from the Centre and 15 % from the States. 
• This is an eye-opener for the proponents of decentralisation as the net result is that the revenue raised by panchayats is meagre even after 30 years of devolution initiatives. 

Reasons for meagre own revenue generation by LSGs:

• Limited Administrative Capacity: Many LSGs lack the administrative capacity to implement effective revenue generation strategies. This includes deficiencies in personnel, training, and technology needed to assess, collect, and manage revenue efficiently.
• Inadequate Legal Framework: LSGs often operate within legal frameworks that constrain their authority to levy taxes or generate revenue from various sources.
• Reluctance of State Governments: 73rd amendment has given the State Legislatures, the responsibility of creating laws to widen the own source of revenue(OSR) of LSGs. These legislations vary widely between states and very few states have given broader powers to LSGs. 
  • In Kerala, the average revenue raised by each panchayat was over ₹60 lakh in 2022-23 and on the other hand it was less than ₹6 lakh in Andhra Pradesh, Haryana, Mizoram, Punjab, and Uttarakhand.
• Low Compliance and Enforcement: Weak enforcement mechanisms and low compliance levels contribute to poor revenue collection. Inadequate monitoring, lax enforcement of tax laws, and widespread tax evasion diminish the effectiveness of revenue generation efforts.
• Dependence on Intergovernmental Transfers: LSGs heavily rely on intergovernmental transfers, such as grants from central or state governments, through the Finance Commission. 
  • In 2022-23, each panchayat earned just ₹21,000(National average) as its own tax revenue and ₹73,000 as non-tax revenue. In contrast, each panchayat earned about ₹17 lakh as grants from the Central government and more than ₹3.25 lakh as grants from the State governments.
• Political Considerations: Elected representatives may prioritise short-term political gains over long-term fiscal sustainability, leading to reluctance in imposing taxes or fees that could be unpopular among constituents.

Ways to improve revenue raising capability of LSGs:

• Legislative backing at the State level: A comprehensive law should be created in all states based on best practices from states like Kerala should be created. Such a law can empower LSGs with greater fiscal autonomy and authority to levy taxes and fees. 
• Capacity Building and Training: Provide comprehensive capacity-building programs and training for elected representatives and officials to enhance their skills in revenue assessment, collection, financial management, and enforcement. This includes training on modern tax administration techniques, financial planning, and budget management.
• Technology Adoption: Embrace technology-driven solutions such as digital payment systems, online tax filing platforms, Geographic Information System (GIS) mapping for property tax assessment, and data analytics for revenue forecasting and compliance monitoring. Leveraging technology can improve efficiency, transparency, and accountability in revenue administration.
• Public Awareness to reduce Political considerations: Launch public awareness campaigns to educate citizens about the importance of contributing to local revenue generation and the benefits of investing in local development initiatives. 
• Participation of Citizens: Encourage citizen participation in budgeting processes, public consultations on tax policies, and community-driven revenue generation projects.
• Economic Development Initiatives: Implement economic development initiatives to diversify the local economy and stimulate growth, thereby expanding the tax base and generating additional revenue. This may include promoting entrepreneurship, supporting small and medium-sized enterprises (SMEs), attracting investment, and developing infrastructure to attract tourism and industries.
• Performance-Based Incentives: Introduce performance-based incentive mechanisms to reward LSGs that demonstrate effective revenue generation and financial management practices. This can lead to a healthy competition among various LSGs, leading to excellence.

Mahatma Gandhi envisaged India’s villages as “Mini Republics”. This dream of the father of the nation can come true only when the LSGs have adequate power and responsibility. Coming out of dependency syndrome is one step in that goal.