This paper reviews the implementation of the Provisions of Panchayats (Extension to Scheduled Areas) Act, 1996 and its implications on the functioning of Panchayats in the tribal areas of Odisha, while examining the role of Panchayats in planning and implementation of the socioeconomic development programmes in these areas. In tribal areas the self-governing institutions otherwise known as Panchayats, have emerged as institution of promoting socio-economic development. Particularly, in the context of the enactment of the PESA Act in 1996, the functioning of the Panchayats in tribal areas in Odisha has witnessed certain institutional changes, though their implications on the political-economy of the tribals have not seen significant changes. The institutionalisation of Panchayats under the framework of the PESA Act and functioning of Gram Sabhas have created space for political inclusion but the effects of this process on social and economic inclusion of the tribals have not become a reality. Increasing incidence of corruption in the matters of beneficiary selection, dominance of the local elites in the decision making and implementation process, and above all delay in planning and implementation of various schemes and programmes have exacerbated the plight of the tribals. Such scenario has raised a question on the morale of the effective functioning of the Panchayats in the tribal areas as per the provision of the PESA Act.