About The State Finance Commission

Context:

According to the Ministry of Panchayati Raj, all states, except Arunachal Pradesh have constituted State Finance Commissions (SFCs). 

Relevance:

GS II: Polity and Governance

Dimensions of the Article:

1. State Finance Commissions (SFCs)
2. Importance of State Finance Commissions
3. Challenges Faced by State Finance Commissions (SFCs)

State Finance Commissions (SFCs)

Constitutional Basis and Establishment

• Constitutional Provision: Established under Article 243-I of the Indian Constitution, State Finance Commissions (SFCs) are mandated to be set up by the Governor of each state.
• Frequency of Constitution: SFCs are required to be constituted every five years following the enactment of the 73rd Constitutional Amendment Act, 1992.

Role and Responsibilities

• Primary Function: The central role of SFCs is to recommend how financial resources should be distributed between the state governments and their respective local bodies, including both Panchayati Raj Institutions (PRIs) and urban local bodies (ULBs).
• Evaluation of Financial Needs: SFCs assess the financial requirements and potentials of local bodies, ensuring that resources are allocated fairly and effectively to meet local governance needs.

Current Status and Recommendations

• Implementation Issues: Despite the constitutional mandate, many states lag in constituting their SFCs regularly. As per the 15th Finance Commission (2021-26), only nine states had constituted their 6th SFC as due in 2019-20, with others stuck at the 2nd or 3rd.
• 15th Finance Commission’s Directives: It has been recommended that states not only establish SFCs and implement their recommendations but also submit action reports to their legislatures. Non-compliance could result in withholding of certain grants.

Importance of State Finance Commissions

Ensuring Financial Health and Autonomy of Local Bodies

• Constitutional Mandate: The regular and timely establishment of SFCs is not just a procedural formality but a crucial element for maintaining the financial health and autonomy of local bodies.
• Fair Allocation of State Revenues: SFCs play a key role in ensuring that state revenues are equitably distributed among various local government tiers, thereby enhancing their financial capabilities.

Complementing Union Finance Commissions

• Integration with National Policies: SFCs complement the allocations made by the Union Finance Commission, which distributes central funds among states and local bodies, ensuring a cohesive financial governance structure across national and local levels.

Improving Local Governance

• Service Delivery Improvement: By recommending fiscal measures and resource allocations, SFCs empower local governments to enhance their service delivery, making them more responsive to the needs of citizens.
• Performance-based Evaluation Systems: SFCs can introduce mechanisms that incentivize better governance practices at the local level through a system of rewards and penalties.

Bridging Functional and Financial Gaps

• Addressing Unfunded Mandates: Local bodies often face challenges due to unfunded mandates where responsibilities are not matched by adequate financial resources. SFCs help address these disparities by recommending appropriate financial devolution.
• Streamlining Fiscal Transfers: Effective recommendations from SFCs can improve the predictability and stability of funding for local bodies, reducing volatility and enhancing fiscal management.

Empowering Local Representatives

• Decentralization of Power: Beyond fiscal matters, the role of SFCs is pivotal in empowering local elected officials, such as municipal councillors and panchayat pradhans, by ensuring they have the necessary resources to fulfill their roles effectively.

Challenges Faced by State Finance Commissions (SFCs)

• State governments frequently exhibit reluctance to delegate full authority and resources to local bodies as prescribed by the 73rd and 74th constitutional amendments.
• SFCs often have to build their data from the ground up due to the absence of accessible and structured information, which diminishes their efficiency.
• The leadership of many SFCs often consists of bureaucrats or politicians rather than specialists in public finance or related fields.
• The lack of skilled technocrats in SFCs compromises the dependability and effectiveness of their recommendations, thereby weakening their influence.
• States commonly neglect to present Action Taken Reports (ATRs) in the legislative assembly following SFC recommendations, leading to a lack of transparency and accountability.
• There is a consistent trend of states disregarding the recommendations of SFCs, which diminishes the SFCs’ role in developing fiscal policies for local governance.
• Observers point out that urban local bodies are frequently overlooked, with minimal political awareness and inadequate public involvement, negatively impacting fiscal decentralization.

-Source: The Hindu