Why in News?

The Ministry of Panchayati Raj highlighted that all states, except Arunachal Pradesh, have constituted State Finance Commissions (SFCs), but delays in their renewal and implementation persist.

Introduction

State Finance Commissions (SFCs) are pivotal in ensuring fiscal federalism by strengthening financial devolution to local bodies in India. Established under Article 243-I of the Constitution, SFCs aim to bridge the functional and financial gaps between state and local governments. However, delays in their constitution and implementation challenges have raised concerns about achieving their intended objectives.

Key Points About State Finance Commissions (SFCs)

  1. Constitutional Mandate
    • SFCs are constitutional bodies established under Article 243-I of the Indian Constitution.
    • Governors are mandated to constitute SFCs within a year of the enactment of the 73rd Constitutional Amendment Act, 1992, and subsequently every five years.
  2. Role and Functions
    • Recommend the distribution of state revenues between the state government and local bodies (PRIs and ULBs).
    • Evaluate financial resources and suggest fiscal measures to optimize their utilization.
    • Ensure equitable financial devolution to empower local governments.
    • Act as a complement to the Union Finance Commission in balancing the financial needs of states and local bodies.
  3. 15th Finance Commission Recommendations
    • Urged states to constitute SFCs promptly and implement their recommendations.
    • Suggested withholding grants for states not complying with constitutional provisions.
    • Mandated the Ministry of Panchayati Raj to certify compliance for grant release during 2024-25 and 2025-26.

Why Appointment of SFCs is Important

  1. Constitutional Requirement
    • Ensures compliance with Article 243-I to uphold financial devolution and autonomy for local bodies.
  2. Fiscal Devolution
    • Facilitates the equitable allocation of funds, strengthening the financial health of PRIs and ULBs.
    • Reduces dependence on state governments by enabling self-sufficiency.
  3. Enhancing Accountability
    • Drives local bodies to improve resource utilization and governance through performance-based evaluation.
    • Encourages transparency and citizen-centric service delivery.
  4. Addressing Local Needs
    • Supports local governance by ensuring adequate resources for infrastructure, health, sanitation, and education.
    • Empowers local governments to cater to community-specific requirements.
  5. Reducing Fiscal Volatility
    • Streamlines fiscal transfers and improves predictability in funding, ensuring uninterrupted governance at the local level.

Challenges with State Finance Commissions (SFCs)

  1. Delays in Constitution
    • Only nine states have constituted their 6th SFC, while many states lag with their 2nd or 3rd SFCs.
    • Lack of adherence to constitutional timelines weakens the role of SFCs.
  2. Political Resistance
    • Reluctance among state governments to devolve power and resources hampers the spirit of decentralization envisaged by the 73rd and 74th Amendments.
  3. Resource Deficiencies
    • Absence of organized data systems makes it difficult for SFCs to assess financial requirements effectively.
  4. Expertise Gap
    • Commissions often lack domain experts, relying instead on bureaucrats or politicians, which affects the quality of recommendations.
  5. Non-Implementation of Recommendations
    • States frequently ignore SFC recommendations, reducing their effectiveness in shaping local fiscal policies.

Way Forward

  1. Adhering to Constitutional Timelines
    • States must regularly constitute SFCs as per Article 243-I to ensure uninterrupted fiscal planning and devolution.
  2. Building Political Consensus
    • Raising awareness about the benefits of empowered local governance can reduce resistance from state governments.
  3. Expert-Led Commissions
    • States should appoint economists, finance experts, and technocrats to lead SFCs for better-quality recommendations.
  4. Strengthening Local Data Systems
    • Local bodies should adopt modern financial reporting systems to facilitate data-driven decisions by SFCs.
  5. Accountability and Monitoring
    • Mandating the tabling of Action Taken Reports (ATRs) in state legislatures can enhance transparency.
    • Independent evaluations of financial devolution mechanisms can ensure proper implementation of SFC recommendations.
  6. Incentivizing Compliance
    • A reward system for states that excel in SFC compliance can foster better fiscal practices and governance.

Conclusion

State Finance Commissions are critical for deepening financial devolution and empowering local governance in India. While constitutional mandates provide the framework, addressing implementation challenges and enhancing the credibility of SFCs is imperative. Strengthening SFCs will not only ensure equitable fiscal transfers but also bolster grassroots democracy and participatory governance, aligning with the vision of decentralized development.

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