The Panchayati Raj Division of NITI Aayog convened a National Workshop on 24^th July, 2025 to address a foundational challenge confronting India’s Rural Local Bodies (RLBs): how to enhance their Own Source Revenue (OSR). While constitutional provisions empower Panchayats to generate and manage local revenue, the ground reality reflects a disconcerting reliance on grants, limiting the fiscal autonomy necessary for effective grassroots governance.

Despite the intent behind the 73rd Constitutional Amendment, which institutionalised a three-tier Panchayati Raj system, the implementation of fiscal devolution remains weak. Under Article 243G, Panchayats are entrusted with 29 subjects listed in the Eleventh Schedule, and Article 243H empowers State Legislatures to authorise Panchayats to levy taxes, duties, tolls, and fees. However, despite these enabling provisions, 95% of Panchayat finances still rely on intergovernmental transfers, rendering them financially dependent and operationally constrained.

Tamil Nadu’s OSR Model: Incentivising Local Accountability

Among India’s states, Tamil Nadu stands out for its robust OSR mobilisation despite ranking only third in India’s Devolution Index. Property tax constitutes the largest share (34%) of Panchayat revenues, followed by professional tax and water charges (21% each). A simple yet effective revenue mechanism requires a Rs. 1,000 non-refundable deposit and Rs. 30 per tap connection—a model that ensures affordability while promoting accountability.

Tamil Nadu has also introduced differentiated trade licensing, tailored to business size (nano to large) and rural/peri-urban distinctions. This adaptive policy approach reflects an understanding of local economic diversity. Further, peri-urban Panchayats are beginning to tap advertisement revenues, aligning with evolving spatial and commercial dynamics.

A major innovation has been the VP Tax Portal, launched in 2023, which digitises tax records and streamlines collection. This tool allows Panchayats to monitor arrears, boost compliance, and minimise leakages—marking a decisive shift toward financial transparency and institutional efficiency.

Gujarat’s Three-Tiered Approach: Scaling Through Digitisation

Gujarat, with its well-structured three-tier Panchayati Raj system—33 District, 248 Taluka, and 14,648 Gram Panchayats—offers another model of success. The state’s OSR surged from Rs. 155.65 crore in 2022 to Rs. 676.74 crore in 2024–25, showcasing how digitisation and institutional incentives can transform local revenue dynamics.

Panchayats in Gujarat raise revenues from a diversified basket of taxes—property tax, water tax, lighting tax, vehicle tax, and even cattle pond tax—and non-tax sources like auction proceeds, rental income, and one-time connection charges. While grants such as those under Swachh Gram and equalisation funds continue to flow, the shift toward self-reliance is evident.

Key digital platforms underpin this transformation. The OSR portal facilitates streamlined collection. The SVAMITVA scheme ensures accurate property records—critical for effective property tax enforcement. The SAMARTH portal enables Panchayats to monetise community assets, while building planning and asset management capabilities. Together, they nurture a virtuous cycle of data-driven governance, revenue growth, and accountability.

Unlocking Value from Common Property Resources

While states like Tamil Nadu and Gujarat demonstrate the potential of proactive local governance, findings from NCAER’s 2021 primary survey of 5,042 Gram Panchayats across 23 states highlight a largely untapped source of revenue: Common Property Resources (CPRs). Only 18% of Panchayats reported generating income from assets such as ponds, tube wells, storage facilities, and pasture lands. The most commonly monetised CPRs included fisheries and pond auctions (21%), tube wells (15%), godown leases (10%), grazing lands (9%), and wells (8%).

The NCAER study points to a key constraint: many Panchayats either lack documented CPRs or are unable to monetise them due to poor asset records, weak administrative capacity, and concerns over community backlash—particularly when charges affect Below Poverty Line (BPL) households. This represents a missed opportunity to broaden the local revenue base in an inclusive and sustainable manner. With proper asset mapping, transparent valuation, and community buy-in—especially through safeguards for vulnerable groups—CPRs could play a far more central role in the fiscal architecture of Panchayats, complementing formal taxation and enhancing financial self-reliance.

The Roadblocks: Institutional and Behavioural Barriers

Despite constitutional backing and digital tools, most Panchayati Raj Institutions (PRIs) exhibit poor tax effort and low non-tax mobilisation. This is not merely a technical problem but a deeper institutional and behavioural failure.

First, a lack of financial literacy and forecasting skills among Panchayat functionaries hampers effective planning and revenue strategy. Second, citizen participation in budgeting, fee setting, and tax compliance remains minimal, weakening the trust-based social contract necessary for sustainable taxation. Third, many State Governments are reluctant to devolve real fiscal power or introduce performance-based incentives, fearing loss of political or bureaucratic control.

This culture of dependence and passivity has crowded out local innovation, resulting in Panchayats waiting for allocations rather than proactively identifying and pursuing revenue streams.

The Way Forward: Reimagining Local Fiscal Strategy

To break this cycle and unlock the fiscal potential of Panchayats, the following strategies are critical:

1. One Panchayat, One Product (OPOP): Modelled after the “One District, One Product” initiative, this approach can help GPs identify niche agro-based or artisanal strengths, driving both livelihood creation and OSR.
2. Capacity Building Under RGSA: Training in budgeting, accounting, cost-benefit analysis, and digital tools must be scaled up through the Rashtriya Gram Swaraj Abhiyan (RGSA). Modules should be simplified and supported by peer-learning platforms.
3. Participatory Budgeting and Digital Gram Sabhas: Public engagement in budgetary processes can improve both transparency and willingness to pay. Technology-enabled Digital Gram Sabhas can bridge information gaps and foster accountability.
4. Incentive-linked Devolution: States should offer matching grants or flexible funds tied to OSR performance, encouraging innovation without penalising the poorest Panchayats.
5. Asset Mapping and Monetisation: GIS-based registries can help identify underutilised CPRs and community assets. Transparent leasing or management partnerships can transform these into recurring revenue streams.
6. Standardisation of Taxation: Developing state-level frameworks for local taxes—including floors, ceilings, and implementation norms—can eliminate ambiguity and enable equitable taxation across Panchayats.

Conclusion: Fiscal Autonomy as a Democratic Imperative

True decentralised governance hinges on fiscal autonomy. Panchayats cannot fulfil their constitutional mandate if they remain financially constrained and grant-dependent. The examples of Tamil Nadu and Gujarat demonstrate how strategic reforms—centred on digital infrastructure, community engagement, and diversified revenue models—can catalyse transformation.

India’s rural development story will remain incomplete without financially empowered Gram Panchayats. Strengthening OSR is not just an accounting fix; it is a democratic imperative that brings government closer to the people. To truly make “Gram Swaraj” a reality, every Panchayat must be enabled—and expected—to chart its own fiscal path.

Authors are with NCAER, View are personal.