
Budget 2025 | Grassroots governments may get a funding boost

Summary
The FY26 Union budget may allocate 5-10% more to the Panchayati Raj ministry, as the government focuses on strengthening local administrative bodies in the villages.New Delhi: The Union budget for FY26 may allocate 5-10% more funds to the Panchayati Raj ministry with a higher outgo towards the Rashtriya Gram Swaraj Abhiyan (RGSA), said ministry secretary Vivek Bhardwaj in an interview.
He added that in the runup to the budget the ministry is planning to take a few initiatives that will help empower local governments— Gram Panchayats (GPs), Panchayat Samitis and Zila Parishads—increase own source revenue (OSR) through local taxes, fees, fines and other charges.
RGSA is a scheme to support local governments deliver on UN sustainable development goals (SDGs) through inclusive governance.
The 15th finance commission says local governments have the potential to raise ₹50,000 crore through house tax every year.
The OSR push is aimed at nudging states and UTs such as Bihar, Jharkhand, Uttar Pradesh, Lakshadweep and northeastern states to adopt an OSR model.
Building locally sourced revenues has become essential to anchoring local government finances on a sound footing, limiting moral hazard and pre-empting financing risks.
Read more: Does India’s fiscal profile need a facelift?
While some countries like Australia and Mexico give local governments full authority to set certain tax rates without consulting upper-level governments, this is not the case in countries like China and India where local governments have inadequate capacity and control over revenue instruments. Their local government revenues from user fee and property have been less than 5% of GDP, Bhardwaj told Mint.
“Therefore, we are planning to take a few initiatives on OSR—commissioning a couple of studies to formulate rules, developing a comprehensive training module and a portal (SAMMARTH) to examine performance of GPs and equip rural local governance bodies with knowledge and skill necessary to generating various sources of revenue in states and UTs where there are no OSR rules," he added.
“This has nothing to do with the upcoming union budget. This is what we are doing with the budget. These are a few measures we are planning to take to make GPs fiscally sustainable. Today they're all dependent on central government and state government grants. They should stand on their own feet. It is going to help them to become self-reliant by having their own money."
On the budget allocation for FY26, Bharadwaj said, “There may be a 5-10% hike as RGSA is likely to get more funds."
The Panchayati Raj ministry was allocated a budgetary resource of ₹1,184 crore in FY25. Of this an RGSA project to empower elected representatives of panchayati raj institutions for leadership roles accounted for ₹1,063 crore.
“Most states have their OSR rules in place. We are trying to nudge the ones that do not have them yet," the official clarified.
States lacking OSR rules
Of 33 states and UTs, 12 do not have rules on OSR. They include Arunachal Pradesh, Bihar, Jharkhand, Manipur, Nagaland, Sikkim and Uttar Pradesh.
The 15th finance commission estimated the potential tax in rural areas. According to its report, there is a ₹42,159-crore potential from house tax in 28 states, against an actual collection of ₹4,953 crore in FY20.
“ ₹50,000 crore could be considered as the potential house tax now," said Bhardwaj, adding, “The National Council of Applied Economic Research (NCAER) took up a study commissioned by our ministry, and it found that 78% of the GPs which have been studied are levying taxes on property, water, license and lighting."
The average per GP OSR in 24 states is estimated to be ₹371,000 and the average tax revenue and non-tax revenue per GP is estimated to be ₹329,000 and ₹84,000, respectively, the Panchayati Raj secretary said, disclosing the findings of the study.
The ministry will take up the recommendations from the report of NCAER and suggested rules and OSR module that is being crafted by a retired veteran government official.