Balancing a gram panchayat budget with a low property-tax collection
A gram panchayat of 8,400 people has annual receipts of ₹62 lakh. Of this, ₹30 lakh is a tied state Finance Commission grant usable only for drinking water and sanitation, ₹12 lakh is an untied grant, property tax collection is ₹7.2 lakh against a demand of ₹18 lakh, non-tax revenue is ₹5 lakh, and ₹7.8 lakh is an opening balance and assigned revenue. Salaries and electricity bills come to ₹9 lakh. Of 3,400 properties, 2,100 are unassessed or undervalued; a GIS survey costing ₹1.5 lakh is expected to raise demand to ₹26 lakh and collection to about 70%. Pending demands are street lights ₹9 lakh, two borewells ₹12 lakh, school toilets ₹6 lakh, a 1.2 km road ₹15 lakh and a drainage line ₹11 lakh. The panchayat must pass a balanced budget, and borrowing needs state approval.
1. Compute the panchayat's discretionary balance and the size of the gap. Rank the pending demands, giving reasons for the order.
Read the worked answer
Available funds:
- Total receipts ₹62 lakh − tied grant ₹30 lakh (cannot be diverted to roads or lights) = ₹32 lakh
- Less salaries and electricity ₹9 lakh = ₹23 lakh of discretionary funds
Gap: pending demands 9 + 12 + 6 + 15 + 11 = ₹53 lakh against ₹23 lakh, so the gap is ₹30 lakh. Some demands can be met from the tied grant, which changes the picture but not the total.
Ranking:
- Drainage ₹11 lakh and one borewell ₹6 lakh - charge to the tied water and sanitation grant. Health gains are large, and stagnant water is a recurring cost avoided.
- School toilets ₹6 lakh - also tied sanitation money; affects attendance, especially of girls.
- Street lights ₹9 lakh in two phases - safety benefit, but every light adds a recurring electricity bill, so the panchayat must budget the O&M before buying.
- Road ₹15 lakh - useful but deferrable; take up a first stretch with a community or MLA fund contribution.
- Second borewell - only after testing yield; a dry borewell is a sunk cost.
The principle is to spend tied money first on the purposes it is meant for, then use scarce untied money on recurring obligations and on works that cannot be funded elsewhere.
2. Should the panchayat spend ₹1.5 lakh on the GIS survey? Show the reasoning.
Read the worked answer
Compare cost with expected gain within the same year:
- Current collection = ₹7.2 lakh
- Expected demand after survey = ₹26 lakh; at 70% collection = ₹18.2 lakh
- Additional collection ≈ 18.2 − 7.2 = ₹11 lakh
- Net gain after survey cost = 11 − 1.5 = ₹9.5 lakh
The survey pays for itself several times over within one year, so the financial case is strong. Two further arguments support it: it corrects horizontal inequity, since 2,100 unassessed or undervalued properties mean honest taxpayers are subsidising others; and a clean assessment list improves the panchayat's case for future grants.
Caveats: the 70% collection rate is an assumption, not a guarantee. Political resistance from undervalued owners is likely, and the panchayat must have staff to issue notices. So proceed ward by ward, publish the assessment list publicly, and offer an early-payment rebate. Approving the survey but failing to follow up with notices would convert the ₹1.5 lakh into a pure cost.
3. Explain the difference between tied and untied grants, and state one risk of a budget that depends heavily on grants.
Read the worked answer
Tied grant: money that must be spent on specified purposes - here drinking water and sanitation. It protects priority sectors that local bodies might neglect, but it also lets the donor, not the local electorate, set the agenda. A panchayat with a broken road cannot use it for the road.
Untied grant: money the panchayat can allocate according to locally felt needs. It respects local information - the panchayat knows which lane floods - but it can be spent on low-priority or visible-only works if planning and audit are weak.
Risk of grant dependence: grants are received from outside and can be delayed or reduced. Salaries and electricity are fixed obligations, and capital works once started cannot be stopped halfway. If the Finance Commission instalment is delayed, the panchayat may default on bills or leave a road half-built. The safeguard is to raise own-source revenue - the GIS survey is exactly that - and to keep a small reserve. A budget balanced only because a grant arrives on time is not a resilient budget.