16th Finance Commission is wrong — Panchayats are constitutional governments, not ‘local bodies’

The 16th Finance Commission’s report, tabled in Parliament by Union Finance Minister Nirmala Sitharaman on February 1, 2026, refers to Panchayats and municipalities as “rural local bodies” and “urban local bodies” — terminology which is incorrect and flawed. The Constitution refers to them as institutions of local self-government. 

If one carefully reads Part IX and Part IX-A of the Constitution, the term “local bodies” does not appear anywhere. The moment we begin calling them local bodies, we push them to a lower level. They are no longer seen as part of the government but as subordinate units under it.

This is the most fundamental problem. Until this conceptual clarity emerges, confusion will continue. If we begin to see them as institutions of local self-government, the entire perspective will change — and so will the way the system functions. At present, the district collector is treated as the ultimate authority in the district. Whether it is the District Panchayat, Block Panchayat, or Gram Panchayat, everything revolves around the Collector. The power structure has evolved in such a way that it runs from the prime minister to the chief minister and then to the district magistrate — and the entire system effectively stops there.

A Constitutional right, not a government favour

It would also be best to avoid framing this as “we have given you so much money.” These are constitutional entitlements, not a favour. After the 73rd and 74th Constitutional Amendments, these institutions became constitutional entities. They therefore have a rightful claim over these funds.

The Fifteenth Finance Commission clearly stated in its recommendations that there must be elected constitutional institutions. In several states, elections to Panchayats and municipal corporations were not even being conducted. After the recommendations of the Fifteenth Finance Commission, the situation improved. The Sixteenth Finance Commission has continued this condition, which is extremely important. It means that if elections are not conducted, the Finance Commission’s funds can be withheld. Once fund allocations began to be stopped, pressure increased and the tendency to delay elections began to change.

How Finance Commission allocations have evolved

The allocation made by the Fifteenth Finance Commission to rural self-governing institutions were below expectations. Compared to the previous commission, the Sixteenth Finance Commission has increased the allocation by nearly 84 per cent. While this increase is not exceptionally large, it is still satisfactory. 

Earlier, the Fifteenth Finance Commission had raised the amount from Rs 2 lakh crore to Rs 2.36 lakh crore. At that time, we had expected that at least Rs 3 lakh crore would be allocated to rural areas, but that did not happen. Instead, Rs 60,000 crore was given to the Ministry of Health in the name of rural panchayats. The Union Ministry of Health and Family Welfare spent this amount as part of its departmental expenditure, without even consulting the panchayats.

The Fourteenth Finance Commission had allocated funds only to Gram Panchayats, and nothing was given to Block and District Panchayats. The reasoning was that Block and District Panchayats would ultimately spend the money in villages. The Fifteenth Finance Commission changed this approach and allocated funds to Gram, Block and District Panchayats. The Sixteenth Finance Commission has continued this practice.

Pushing states to define roles and strengthen State Finance Commissions

However, even though the total allocation for rural panchayats has increased, it is possible that in some states the share of Block and District Panchayats may decline, or that any increase may merely compensate for inflation. There is a reason for this. Most states have not clearly defined the roles of District and Block Panchayats in their Panchayati Raj Acts. The role of the Gram Panchayat is clear because people live within its jurisdiction and most local work falls under it. But Block and District Panchayats have largely remained administrative structures.

If state governments wish to receive greater funds in the future through the recommendations of the Central Finance Commission, they will have to clearly define the roles of Block and District Panchayats in their Panchayati Raj Acts. At present, most states do not have such clarity in its legislation.

The Finance Commission has also tried to exert pressure with regard to State Finance Commissions. In several states, the reports of State Finance Commissions remained pending for up to two years without any final decision. This time, efforts have been made to ensure that states constitute State Finance Commissions on time and take timely decisions on their reports. This is a legitimate concern.

Tied vs untied grants and local autonomy

The issue of tied and untied grants is also very important. Previously, the Fifteenth Finance Commission placed 60 per cent of the funds under tied grants, leaving only 40 per cent as untied. Tied funds mean that local governments have little flexibility. Whether it is the Gram Sabha or the Gram Panchayat Development Plan, whatever plan is prepared, 30 per cent must be spent on drinking water and 30 per cent on sanitation — regardless of whether the local community actually prioritises these needs. This weakens local autonomy.

The Sixteenth Finance Commission has now made the ratio 50:50. Ideally, tied funds may not be necessary at all. Gram Sabhas should decide how their funds are spent. However, pressure from central ministries makes this difficult. Water supply and waste collection are basic responsibilities of any local government. There is no need for a new law or constitutional amendment for this. Instead, service-level benchmarks should be defined and local governments should be expected to meet them.

If we look at performance-based grants, Rs 43,524 crore has been earmarked for performance-based grants for rural local bodies, and another Rs 43,524 crore for the states’ performance component. This means that a total of about Rs 87,000 crore has been linked to performance out of a total allocation of Rs 4,35,236 crore. In this context, the basic grant amounts to approximately Rs 3,48,000 crore.

Within the performance component for rural local bodies, emphasis has been placed on own-source revenues such as property tax and user charges. It has been stated that if a Panchayat generates a minimum revenue of Rs 1,200 per household per year, it will be eligible. This includes both property tax and user charges combined, and therefore the requirement is not unreasonable.

Accountability and public trust

In many villages, systems for waste collection and disposal already exist. People say they are willing to pay Rs 50 per month provided the service is regular. In some Panchayats, tractors used to collect waste once every three days, but residents want daily service. At the same time, it must be noted that in several states Panchayats do not even have provisions in their laws to levy taxes. It is hoped that state governments will make the necessary changes.

If people begin to believe that the Panchayat and the Panchayat Secretary act arbitrarily and treat the system as a source of personal income, public participation will decline. Accountability mechanisms are therefore extremely important. Panchayats must remain accountable to the Gram Sabha.

All of this will be possible only if Panchayats improve their own functioning. At present, systems of accountability and transparency — such as auditing processes and the quality of data — remain weak. Special efforts will be required to strengthen these areas. I am confident that the Comptroller and Auditor General and the Union Ministry of Panchayati Raj are taking this issue seriously.

Sunil Kumar is former secretary for Union Ministry of Panchayati Raj 

Views expressed are the author’s own and don’t necessarily reflect those of Down To Earth