Panchayati Raj and Local Government Finance

India’s federal system does not stop at the State. It reaches down to the village and the town. The 73rd and 74th Amendments gave local bodies constitutional status in 1992. This lesson explains how villages and towns govern themselves. It also asks the harder question: where does their money come from, and do they have real power?

1Chapter 1: The Two Big Amendments of 1992

Must Know

73rd for villages, 74th for towns

• Parliament passed both amendments in 1992 under Prime Minister P.V. Narasimha Rao.
• The 73rd gave constitutional status to rural Panchayati Raj Institutions. It came into force on 24 April 1993.
• The 74th did the same for urban local bodies. It came into force on 1 June 1993.
• The 73rd added the 11th Schedule, with 29 subjects for Panchayats.
• The 74th added the 12th Schedule, with 18 subjects for municipalities.
• Read more: Panchayati Raj Institutions in India and Article 243 of the Constitution.

Why 1992 mattered

• Before 1992, local bodies existed only where a State law created them.
• States could dissolve them at will.
• Elections were often delayed for years.
• The amendments made local government a constitutional entitlement.

Elected, and reserved

• Every Panchayat and municipality must be elected every five years.
• An independent State Election Commission runs the polls under Article 243K.
• Seats and chairperson posts are reserved for women, Scheduled Castes and Scheduled Tribes.
• Reservation for SCs and STs is in proportion to their local population.
• At least one-third of all seats go to women.

Roots and exceptions

• Panchayati Raj began in 1959.
• The Ashok Mehta Committee of 1977–78 proposed reviving it as a two-tier system.
• Meghalaya, Nagaland and Mizoram are exempt. They rely on their own tribal councils.

2Chapter 2: Urban Local Bodies and the Schedules

Must Know

Three types of urban bodies

• Municipal Corporation: the largest type, for big cities. It has the widest powers.
• Municipal Council: for smaller towns, too small for a Corporation.
• Nagar Panchayat: for areas moving from village to town. Many fast-growing places pass through this stage.
• The split follows population and how developed the area already is.

Lists of possibilities

• The 11th Schedule lists 29 subjects, from agriculture and land improvement to sanitation and rural housing.
• The 12th Schedule lists 18 subjects, including urban planning, public health and slum improvement.
• Both only list what a State may hand over.
• No State is forced to transfer every subject.

3Chapter 3: Where Local Bodies Get Their Money

Good to Know

Three sources together

• Own revenue: property tax, local cess, user fees and licence charges.
• State transfers: through the State Finance Commission.
• Central schemes: funds tied to national programmes. They must usually be spent on that scheme’s purpose.
• Exams ask you to name all three.

The State Finance Commission

• Article 243I requires every State to set up a State Finance Commission every five years.
• It is a State-level mirror of the Union Finance Commission, but for Panchayats and municipalities.
• It recommends how the State’s own tax revenue is shared between the State and its local bodies.
• This includes the proceeds of specific State taxes.
• Its advice is not binding.
• The State reads it and decides how much to act on.
• It is the money pipeline that decides whether local government is financially real or only constitutionally real.

4Chapter 4: Gram Sabha and Social Audit

Good to Know

The Gram Sabha

• The Gram Sabha is not an elected body.
• It is every adult registered voter in the village, meeting as a general assembly.
• Article 243A asks States to give it real functions.
• It often approves development plans and beneficiary lists before the Panchayat acts.

Social audit

• In a social audit the village assembly reviews how scheme money was spent.
• It checks government records against what people actually saw.
• This is an extra check on top of the government’s own audit.
• It brings accountability from the people the scheme serves.
• Read more: Social Audits: Concept, Legal Basis and Practice.

Capacity decides the result

• An audit works only if the Gram Sabha can read financial records and compare them with what was built.
• Without information, training or outside help, it cannot audit complex spending.
• Legal standing on paper does not guarantee an effective audit.
• Article 40 is the Directive Principle behind village self-government. Read: Article 40 of the Constitution.

5Chapter 5: Formal Power versus Real Power

Great to Know

The gap

• Passing the amendments was easy.
• Handing over real tax power has been hard.
• Devolving tax power means a State giving up control of money it collects and spends itself.
• Many States have gone no further than the constitutional minimum.
• So how much independence a Panchayat or municipality has depends on its own State, not on the Constitution alone.
• The same 1992 amendments produced very different outcomes across States.

Democratic decentralisation

• The idea is to push real decision-making power down to elected local bodies.
• They are not meant to be only agents carrying out tasks for the Centre or State.
• This extended democracy down to the village itself.
• Reservations were meant to make it inclusive from the start.

6Chapter 6: PESA, the Law for Tribal Areas

Great to Know

Why a separate law

• The Panchayats (Extension to Scheduled Areas) Act, 1996 is called PESA.
• It extends the Panchayati Raj system to the Fifth Schedule’s tribal areas.
• The 73rd Amendment had originally left these areas out.
• Fifth Schedule areas, spread across ten States, have their own customary systems of self-governance.
• PESA fits the Panchayat structure around those institutions. It does not override them.
• Read more: The Fifth Schedule of the Indian Constitution.

What it gives the Gram Sabha

• Control over minor forest produce.
• A say before land is acquired or transferred.
• A role in preventing moneylending that traps tribal households in debt.
• So PESA shows how the general framework had to be adapted, not simply extended.

7Chapter 7: National Panchayati Raj Day, 2026

Great to Know

24 April 2026

• The Ministry of Panchayati Raj held National Panchayati Raj Day at Vigyan Bhawan, New Delhi.
• It marked 33 years since the 73rd Amendment came into force in 1993.
• The Ministry released the Panchayat Advancement Index (PAI) 2.0 report.
• It also released three books on rural heritage, in a “Meri Panchayat Meri Dharohar” series.
• Elected Panchayat representatives from across the country took part.
• The date is an exam fact. 24 April marks when the amendment came into force, not when it was passed.
• Source: PIB.

8Previous Year Questions

Exam angle: real questions on this topic.

Quick Q&A

• 73rd in force? 24 April 1993.
• 74th in force? 1 June 1993.
• Subjects in 11th Schedule? 29.
• SFC under? Article 243I.
• PESA year? 1996.