Panchayats will have to compete for extra funds

The initiative by Union Minister for Panchayati Raj Mani Shankar Aiyer plans to make available a well-designed system of incentives to ensure that all three levels of Panchayats (District, Block and Village) compete.

To this effect, a Rs 5000-crore per year Panchayat Empowerment and Accountability Incentive Fund (PEAIF) will be set up, vested with the Union Ministry. It will continue for the period of the Eleventh Five Year plan.

Although a chunk of this fund will be used for empowerment activities, most of it will go towards incentives linked to better performance.

To avoid any discretion in disbursal of funds, the rewards will be calibrated to the Devolution Index that is being prepared by the National Council of Applied Economic Research (NCAER). This index will act as a pricing/value signal for competing Panchayati Raj systems of different states.

The index will rank the performance of individual states on 150 identified basic action points, which puts special emphasis on productive economic activity and employment generation measures.

In fact, the current design envisages linking the amount of incentivised fund for each state to improvement in performance on Devolution Index rather than the level of performance in the previous year. The logic: even a marginal improvement in performance of a better performing state would entail larger share of funds from PEAIF and diminish share for poor performers even if they improved.

Thus, if a poor performing state made substantial progress but still remained below the levels of better performing states, the improvement in performance should be rewarded accordingly to encourage the progressive trend in that state. This design is aimed to avoid the continuous rewarding of well-performing states and continuous punishment for poor performers.

The NCAER has already submitted an interim report on Devolution Index to the Ministry of Panchayati Raj and the Ministry is expected to come out with the final document on Devolution Index by the end of January 2007. The ministry has already made an allocation for Rs 10 crore for the pilot scheme in 2006-07. Talks with the Planning Commission will begin soon.

In addition to funds from planned allocation, Aiyer has already started talks with external aid agencies like World Bank to fund this empowerment scheme for Panchayats. If all goes well, the scheme will be launched in the next financial year and will continue for entire Eleventh Plan period.