STATE FINANCE COMMISSIONS (SFCs)

The Ministry of Panchayati Raj reported that all states except Arunachal Pradesh have constituted State Finance Commissions (SFCs). The 15th Finance Commission expressed concerns about delays in SFC constitution.

Key Points about State Finance Commissions (SFCs)

  • Constitutional Mandate:
    • Established under Article 243-I of the Constitution.
    • Governors must constitute SFCs within one year of the 73rd Amendment (1992) and every five years thereafter.
    • Recommend financial resource distribution between the state government and local bodies, i.e., Panchayati Raj Institutions (PRIs) and Urban Local Bodies (ULBs).
  • 15th Finance Commission Recommendations:
    • States must:
      • Constitute SFCs.
      • Implement recommendations.
      • Submit Action Taken Reports (ATRs) to legislatures.
    • Suggested withholding grants for non-compliance.
    • Role of the Ministry of Panchayati Raj: Certify state compliance with constitutional provisions before releasing grants for 2024-25 and 2025-26.

Importance of State Finance Commissions (SFCs)

  • Constitutional Requirement:
    • Ensures regular fiscal devolution to local bodies for their financial health and autonomy.
  • Fiscal Devolution:
    • Balances state revenue allocation across local tiers to strengthen governance.
  • Enhancing Accountability:
    • Evaluates financial needs, recommends resource utilization, and promotes better service delivery.
  • Directly Addressing Local Needs:
    • Empowers local bodies to improve essential services like sanitation, health, education, and infrastructure.
  • Bridging Financial Gaps:
    • Addresses unfunded mandates by recommending fiscal transfers based on responsibilities.
  • Political and Administrative Decentralization:
    • Empowers local representatives (e.g., panchayat pradhans) through financial autonomy.

Challenges Faced by SFCs

  • Compliance Issues:
    • Only nine states have constituted their 6th SFC; many remain stuck at earlier stages.
  • Lack of Political Will:
    • Resistance to fully devolve power and resources, contradicting the 73rd and 74th Amendments.
  • Resource Deficiencies:
    • Data scarcity hampers SFC functioning, requiring them to start from scratch.
  • Expertise Deficiencies:
    • Lack of qualified technocrats and public finance professionals in SFCs reduces the quality of recommendations.
  • Opaqueness and Non-Compliance:
    • States often fail to table ATRs or implement SFC recommendations, reducing transparency.
  • Public Resistance:
    • Limited political awareness and engagement hinder effective fiscal decentralization.

Way Forward

  • Ensure timely SFC formation and regular monitoring for adherence to deadlines.
  • Educate states on the benefits of empowered local governance for better citizen satisfaction.
  • Include economists and public finance professionals to improve efficiency and credibility.
  • Modernize local data systems for accurate financial reporting and informed decision-making.

State Finance Commissions play a crucial role in strengthening financial autonomy and governance at the grassroots level. Timely constitution, expert-led recommendations, and transparent implementation of SFC findings are essential to achieving balanced fiscal federalism and effective local governance.

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