The grants have strengthened local finances, but deep-rooted institutional constraints remain a challenge
For more than a decade, Finance Commission (FC) grants have served as the backbone of fiscal decentralisation in India. They were intended to give Panchayats predictable, formula-based resources so that local governments could plan works, maintain essential services and respond to citizens’ needs without navigating layers of approvals.
NCAER study
The latest NCAER study, which covers more than 500 Gram Panchayats across diverse States, shows that while FC grants have significantly strengthened local finances, their transformative potential remains un-even and constrained by deep-rooted institutional challenges.
There is no doubt that the quantum, predictability and autonomy associated with FC funds have expanded the operational space for Panchayats. Many local governments now receive funds on time, allowing them to prepare more structured annual plans. Panchayats across States reported that the grants helped them address basic civic needs —repairing drains, restoring handpumps, improving waste disposal, or upgrading community infrastructure — more efficiently than before.
Tied grants, allocated specifically for drinking water, sanitation and O&M, have brought visible WASH (Water, Sanitation and Hygiene) improvements. In several States, more than half the surveyed Panchayats reported full utilisation of these funds, and the physical assets created— pipelines, soak pits, repaired tanks, waste collection points — reflect this momentum.
Untied grants have been even more empowering, giving Panchayats the freedom to respond flexibly to emerging issues, whether repairing a rural road damaged by unexpected rains, hiring sanitation workers temporarily, or addressing gaps not covered under any centrally sponsored scheme.
Persistent bottlenecks
Yet the study also highlights persistent bottlenecks that dilute the over-all impact of FC grants. Weak planning and documentation systems remain a major hurdle. Many Gram Panchayats prepare annual plans in a largely mechanical way, often reusing old templates rather than grounding priorities in real household-level needs. Critical tools such as asset registers, service-level benchmarks and risk maps are incomplete or missing altogether. As a result, funds are spent, but not always on the highest-impact activities.
Capacity constraints are equally significant. Panchayat secretaries are frequently overburdened, sometimes managing multiple GPs. Technical personnel—engineers, accountants, data assistants—are often unavailable, and elected representatives rarely receive continuous training on procurement, financial reporting or O&M planning. Even the existing capacity-building programmes for secretaries and executive officials are out dated and need to be refreshed to reflect current technologies and ad-ministrative practices.
In this environment, even motivated Panchayats find it difficult to pre-pare robust plans, execute works efficiently, or uphold the transparency and compliance standards expected for FC-funded activities. In such contexts, even well-intentioned Panchayats struggle to prepare quality plans, execute works efficiently or maintain the transparency standards required for FC-funded activities.
Compounding this is the issue of over-regulation from higher administrative tiers. Despite the intent of the Finance Commissions to allow local autonomy, some States continue to impose unnecessary restrictions on the range of permissible works, or create procedural delays through complex approval and audit requirements. This restricts the very discretion that FC grants were designed to enhance. The result is a highly un-even picture: while some States and districts demonstrate high utilisation of both tied and untied grants, others struggle to cross even the half way mark. Differences in institutional capacity, staffing levels and State-level governance norms create unequal development opportunities for rural communities across India.
Operations and maintenance gap
A particularly critical gap highlighted by the study is in the area of operations and maintenance. The 15th Finance Commission rightly placed strong emphasis on O&M for water and sanitation assets, recognising that sustainability depends on regular upkeep. However, field evidence shows that O&M plans are rarely prepared, user charges remain mini-mal, and most Panchayats depend almost entirely on grants even for routine maintenance. The consequence is predictable: infrastructure gets built, but its long-term functionality is not guaranteed.
If FC grants are to fully empower Panchayats, the next phase of decentralisation must focus as much on institution-building as on fund transfers. Strengthening local capacity is essential — through regular training for elected members and staff, dedicated accountants at the GP level, and access to technical support for preparing and monitoring works. Planning processes need to shift from mechanical GPDP preparation to evidence-based, forward-looking strategies grounded in actual service gaps, demographic trends and environmental risks.
More transparency needed
Transparency must be enhanced through simple mechanisms such asopen budget displays, social audits and public dashboards on O&M performance, which build citizen trust and improve accountability.
Finance Commission grants have undoubtedly widened the fiscal and functional space for Panchayats. They have enabled improvements in basic services, encouraged local initiative and made frontline governance more responsive. But empowerment requires more than monetary transfers.
Without stronger institutions, better planning systems, and clearer ac-countability, the potential of these grants will remain only partially realised. India’s rural governance system stands at a turning point: with the right investments in capacity and systems, FC grants can evolve from a financial support mechanism into a genuine cornerstone of grassroots development.
Bandopadhyay is Senior Fellow, Joshi is Fellow and Bharadwaja is Research Associate, at NCAER, New Delhi. Views are personal.
