State Finance Commissions: An Analysis


There is a need to strengthen State Finance Commissions (SFCs)

Constitutional Provisions

  • The State Finance Commission was created by the 73rd and 74th Constitutional (Amendment) Acts. SFCs were created to review the financial position of the panchayats and municipal corporations, and to make recommendations to the Governor.
  • Article 243I prescribes that the Governor of a State shall constitute a Finance Commission to review the financial position of the Panchayats to make recommendations to the Governor
  • Article 243 (Y) of the Constitution further provides that Finance Commission constituted under Article 243 (I) shall review financial position of the Municipalities and make recommendations to the Governor

Note: State Finance Commissions are constituted every five years

Role and Functions of State Finance Commission:

State Finance Commissions are required to recommend on the following:

  1. The principles that should govern-
  2. the distribution between the state and the local governments (panchayats and ULBs) of the net proceeds of taxes, duties, tolls and fees leviable by the state and the inter se allocation between different panchayati raj institutions (PRIs) and urban local bodies(ULBs)
  3. The determination of taxes, duties, tolls and fees which may be assigned to, or appropriated by the local bodies,
  4. Grants-in-aid from the consolidated fund of the State to the local bodies
  5. The measures needed to improve the financial position of the Panchayats
  6. Any other matter referred to the Finance Commission by the Governor in the interests of sound finance of the Panchayats

A comparison between central and State finance commissions:


Issues and Challenges:

  1. Since 1993-94, most of the states have constituted three to four commissions keeping in line with the constitutional requirement. A 2013 report by think-thank National Social Watch pointed out that Jharkhand did not appoint a SFC even after 13 years of the state formation.
  2. The state finance commissions experience constraints due to various reasons such as lack of follow up from the local bodies, apathetic attitude of the states, lack of clarity about the role and functions of local bodies, and deplorable conditions of the finances at municipal and panchayat levels
  3. Another major issue is with the composition of SFCs. The SFCs are mainly dominated by the presence of bureaucrats rather than academicians.
  4. Unlike the Union Finance Commission (UFC), the SFCs face dearth of reliable data. The local governments do not have a proper budgetary system and hence SFCs face problem while collecting data and consequently assessing the financial condition of the local government.
  5. There is erroneous belief among several politicians, policy makers and even experts that SFCs and the local governments they deal with have an inferior constitutional status when compared to the UFC
  6. The Union Finance Commissions have not analysed SFC reports properly and have not taken adequate steps to strengthen SFCs and address the problem devolution of finances to local bodies.

RBI Recommendations (2009) for strengthening SFCs

  1. Provide a uniform template to the SFCs so that there are not constituted in a casual manner
  2. Incentivise the State Governments to set up a data warehouse for the local bodies.
  3. Set up a central pool of fiscal experts from which the State Governments may select at least one member of SFC.
  4. Provide a time line to the State Governments in link to the release of share in central taxes for making progress in the arena of SFC.

Way Forward:

  1. In line with constitutional requirements, the states should constitute SFCs in a periodic manner
  2. It is important to acknowledge the role of SFCs. It is important to rectify the notion the SFCs are less important the UFC and that local governments are insignificant. The Constitution treats a local government on a par with a State government, especially when it comes to sharing of financial resources.
  3. The information of responsibilities and funds allocated to local bodies should be recorded properly so as to provide reliable data to the SFCs
  4. The composition of SFCs should incorporate representatives from the intellectual civil society/academicians and not solely comprise of bureaucrats
  5. To make India a sustainable and inclusive country, it is important that the UFC reduce inter-state disparity and then only SFCs can reduce intra-state disparity by using horizontal distribution criteria
  6. It is an urgent need to strengthen the SFCs to promote cooperative federalism and strengthen participatory democracy.
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