73rd amendment of the Constitution passes a law in 1993, giving panchayats a constitutional status which means panchayats are local self governance body, making them a third tier governance. The purpose of the study is to analyze the state of finance of the panchayati raj institution, its making and the role they play in the working of a three tier government. .The paper brings out the anomalies in the assignment between Centre, state and local bodies. Critically analyze the lack of funding to the local bodies at rural level.

Keywords : Decentralization, Rural Finance, Panchayati Raj Institution, Federalism.