Functions and finances: Eleventh Schedule, SFCs and own revenue

Detail

1. The Eleventh Schedule: what panchayats may do

• Eleventh Schedule means a list of 29 subjects on which panchayats can be given work. The 73rd Amendment Act, 1992 added it to the Constitution. It is linked to Art. 243G.
• The list does not give panchayats any power by itself. A power reaches a panchayat only when the state passes a law that gives it.
• The 29 subjects, grouped for memory:

Group	Subjects (Eleventh Schedule entry numbers)
Farm and land	(1) agriculture and agricultural extension; (2) land improvement, land reforms, land consolidation, soil conservation; (3) minor irrigation, water management, watershed development; (4) animal husbandry, dairying, poultry; (5) fisheries; (6) social forestry and farm forestry; (7) minor forest produce
Rural industry	(8) small-scale industries, including food processing; (9) khadi, village and cottage industries
Basic services	(10) rural housing; (11) drinking water; (12) fuel and fodder; (13) roads, culverts, bridges, ferries, waterways; (14) rural electrification, including distribution of electricity; (15) non-conventional energy sources
Anti-poverty	(16) poverty alleviation programmes
Education and culture	(17) education, including primary and secondary schools; (18) technical training and vocational education; (19) adult and non-formal education; (20) libraries; (21) cultural activities
Economy and health	(22) markets and fairs; (23) health and sanitation, including hospitals, PHCs and dispensaries; (24) family welfare
Social justice	(25) women and child development; (26) social welfare, including welfare of persons with disabilities; (27) welfare of weaker sections, especially SCs and STs
Supply and assets	(28) public distribution system (PDS); (29) maintenance of community assets

• Exam trap: the subjects are "primary and secondary" education, not higher education. The list has "minor" irrigation and "minor" forest produce, not major ones.

2. Devolution under Art. 243G: optional, not compulsory

• Devolution of powers to panchayats means the state hands over three things to panchayats: functions (work), funds (money) and functionaries (staff). People call these the "3 Fs".
• Art. 243G says the state legislature "may" make a law that gives panchayats powers and authority. With these, panchayats can work as institutions of self-government. The law may cover:
• preparing plans for economic development and social justice;

• implementing schemes, including schemes on the 29 Eleventh Schedule subjects.

• Why "may" matters:

• The word "may" makes devolution optional.
• So each state decides how much power to give.

• So states differ widely. Kerala and Karnataka gave a lot; many others gave little.

• Class 11 NCERT notes that "many States have not transferred most of the subjects."

• An NCERT cartoon asks why states transfer only State List subjects. The reason is that a state can give away only its own powers. Union List subjects are not the state's to give.
• Activity mapping means breaking each subject into small activities and assigning each activity to one tier: gram panchayat, panchayat samiti (block) or zila parishad (district). Everyone then knows who does what, and there is less overlap.
• Example: under "drinking water", the gram panchayat may repair hand pumps, the block may run multi-village schemes, and the district may plan new sources.
• The Ministry of Panchayati Raj (MoPR) and the Second Administrative Reforms Commission (2nd ARC) have pushed states to do activity mapping.

3. Money powers: Arts. 243H, 243I, 243J and 280(3)(bb)

Article	What it provides	Mandatory or optional
243H	The state may by law (a) let panchayats levy, collect and keep taxes, duties, tolls and fees; (b) give them taxes the state collects; (c) give grants-in-aid from the Consolidated Fund of the State; (d) create funds for panchayat money	Optional ("may")
243I	The Governor sets up a State Finance Commission (SFC)	Mandatory ("shall")
243J	The state may by law provide for keeping and auditing panchayat accounts	Optional ("may")
280(3)(bb)	The Union Finance Commission recommends ways to add to a state's Consolidated Fund so the state can support its panchayats, based on that state's SFC's advice	Mandatory duty of the Union FC

• Art. 280(3)(bb) was added by the 73rd Amendment, 1992. Clause (c) was added for municipalities by the 74th Amendment.

4. State Finance Commission (Art. 243I)

• State Finance Commission (SFC) means a body the Governor sets up to look at panchayat finances and suggest how state money should be shared with them.
• Timing:
• the first SFC within one year of the 73rd Amendment coming into force (24 April 1993);

• after that, a new SFC at the end of every fifth year.

• What the SFC recommends:

• Vertical sharing: how the net proceeds of state taxes, duties, tolls and fees are divided between the state and panchayats.
• Horizontal sharing: how the panchayats' share is divided among the tiers (village, block, district). NCERT adds that it is also divided between rural and urban bodies.
• Which taxes and fees panchayats may levy or be given.
• Grants-in-aid from the state's Consolidated Fund.

• Steps to improve panchayat finances.

• Reporting: the Governor lays the SFC report before the state legislature, with a note on the action taken (Art. 243I(4)).

• Why it matters: NCERT says the SFC keeps the sharing of money from becoming "a political matter". The rule-based formula replaces favours.
• Gaps in practice:
• SFCs are often set up late.
• Their reports are often not tabled, or are tabled but not acted on.

• The Standing Committee on Rural Development and Panchayati Raj (report presented 29 July 2025) noted that only 25 of 28 states had set up SFCs. It said this was so even though, from 2024-25, setting up an SFC is a condition for getting central grants [3].

• Grant condition: under the 15th FC, details of the SFC became a mandatory condition for releasing grants after March 2024 [3]. The 16th FC (2026-31) keeps "timely constitution of the State Finance Commission" as one of its three entry-level conditions for all local body grants [4].

• An NCERT cartoon asks how states that are short of money themselves can fund local bodies. This is the core weakness of the system: panchayats depend on states that are themselves short of money.

5. Own-source revenue: very small

• Own-source revenue (OSR) means money a local body raises by itself, not money it gets as grants. Examples:
• house and property tax;
• market fees and fees at fairs;
• water charges;

• fines and licence fees.

• NCERT's ratio (dated): rural local bodies raise only 0.24% of total government revenue but account for about 4% of government spending. They spend far more than they raise.

• RBI study, "Finances of Panchayati Raj Institutions" (January 2024):
• It covered about 2.58 lakh panchayats over 2020-21 to 2022-23 [2].
• Own revenue was only 1.1% of panchayats' total revenue [2].
• Grants-in-aid from the Centre and states made up over 95% of receipts [2].

• Own sources were mostly property taxes, fees and fines [2].

• Why OSR stays low:

• States have given panchayats only a few taxes they can levy.
• Elected heads avoid taxing their own voters.
• Property is often not valued properly.

• Collection staff are weak.

• The 2025 Standing Committee called for financial and technical help so panchayats can raise more of their own revenue [3].

6. Finance Commission grants: tied and untied

• Tied grant means money that can be spent only on set purposes, such as sanitation or water.
• Untied grant (also called basic untied grant) means money a panchayat can spend on its own local needs.
• Performance grant means money released only if a body meets set conditions, such as audited accounts or a rise in own revenue.

Finance Commission	Period	Amount for rural bodies	Structure
14th FC	2015-20	—	Grants to gram panchayats only; 90% basic, 10% performance
15th FC	2021-26	₹2.36 lakh crore	60% tied, 40% untied; tied grants only for sanitation (including ODF maintenance) and drinking water (including rainwater harvesting) [3]. Tied grant for water and sanitation: ₹1.42 lakh crore [5]
16th FC	2026-31	₹4,35,236 crore (≈ ₹4.35 lakh crore) [4]	Basic ₹3,48,188 crore (80%) and performance ₹87,048 crore (20%) [4]. Basic is split 50% untied and 50% tied to sanitation and solid waste management and/or water management [4]

• ODF means open defecation free: a village where no one defecates in the open.
• 16th FC, wider picture:
• total local body grants are ₹7,91,493 crore; urban bodies get ₹3,56,257 crore [4];

• grants come only after three entry-level conditions are met:

  • (i) local bodies are constituted as the Constitution requires;
  • (ii) provisional and audited accounts are published;
  • (iii) the SFC is set up on time [4].

• 15th FC conditions: at least 25% of local bodies had to put their provisional and audited accounts online [3]. By November 2024, 70% of the 15th FC grants had been released to states [3].

• These grants are part of fiscal federalism, meaning how money is shared among the Union, the states and local bodies.

7. A comparison: Bolivia

• Bolivia passed the Popular Participation Law in 1994.
• It automatically shares 20% of national tax collections among 314 municipalities, on a per head (per capita) basis.
• Contrast with India:
• In Bolivia, sharing is automatic, by formula, and set by law at the national level.
• In India, it depends on state discretion (Art. 243H) and on SFC reports that are often ignored.

Prelims Hooks

• Eleventh Schedule has 29 subjects. It was added by the 73rd Amendment, 1992 and is linked to Art. 243G. (The Twelfth Schedule has 18 subjects for municipalities.)
• The Eleventh Schedule covers primary and secondary education, not higher education. It covers minor irrigation and minor forest produce, not major ones.
• Art. 243G uses "may", so transferring subjects to panchayats is optional for states.
• Art. 243H covers panchayats' power to tax and grants to them. Art. 243I covers the SFC. Art. 243J covers audit. Art. 280(3)(bb) gives the Union FC a duty to recommend ways to augment state funds for panchayats.
• The Governor, not the President, sets up the SFC. The first SFC was due within 1 year of 24 April 1993, and a new one every 5 years.
• RBI study (2024): own revenue was 1.1% of panchayat revenue, and grants were over 95% [2].
• 15th FC: ₹2.36 lakh crore for rural local bodies, 60:40 tied:untied. 14th FC: gram panchayats only, 90:10 basic:performance.
• 16th FC (2026-31): ₹4,35,236 crore for rural local bodies. The split is 80:20 basic:performance, and basic is split 50:50 tied:untied. Timely SFC is an entry condition [4].
• Bolivia (1994 Popular Participation Law) automatically shares 20% of national taxes per capita among 314 municipalities.

Mains Points

• Panchayats get duties without power. The word "may" in Arts. 243G and 243H makes devolution depend on each state.
• Most states transfer subjects on paper but keep the funds and staff.
• Panchayats are left as agents that carry out state and central schemes.

• Reform: make activity mapping compulsory, link it to state budgets, and add a devolution index.

• Panchayats depend on grants. Own revenue is about 1% of receipts [2].

• Panchayats answer upward to the Union and states, not downward to their own voters.

• Reform: give panchayats stronger property tax powers, value property using GIS maps, and reward higher own revenue through performance grants.

• SFCs are weak. They are set up late, and their reports are not tabled or acted on. Only 25 of 28 states had set one up by 2025 [3].

• Making a timely SFC a condition for Union grants, as the 15th and 16th FCs did, is a useful lever [3][4].

• Reform: set a legal deadline for tabling SFC reports with an action-taken report, and give SFCs permanent staff.

• Tied or untied grants: a trade-off. Tied grants protect national goals such as ODF villages and safe water. Untied grants respect local choice.

• The 16th FC's 50:50 split of basic grants, with all performance grants untied [4], is a middle path.
• Bolivia's automatic, formula-based sharing shows a more predictable model.