State Finance Commission | 18 Nov 2024

Source: IE

Why in News?

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

• The 15^th Finance Commission, in its report, expressed significant concern over delays in constituting SFCs. 

What are the Key Points about State Finance Commissions (SFCs)? 

• About: SFCs are constitutional bodies established by states under Article 243-I of the Indian Constitution. 
  • As per Article 243-I, the Governor is required to constitute an SFC within one year from the enactment of the 73^rd Constitutional Amendment Act, 1992 and every five years thereafter. 
• Mandate: Their primary role is to recommend the distribution of financial resources between the state government and its local bodies i.e., Panchayati Raj Institutions (PRIs) and urban local bodies (ULBs). 
• 15^th Finance Commission on SFCs: The 15^th Finance Commission recommended states establish SFCs, implement their recommendations, and submit an action report to the legislature. 
  • It suggested withholding grants for states that do not comply with these requirements. 
• Role of Ministry of Panchayati Raj: It is tasked with certifying compliance by states with constitutional provisions for SFCs before the release of grants for 2024-25 and 2025-26. 

Why Appointment of State Finance Commissions (SFCs) is Important? 

• Constitutional Requirement: Regular and timely constitution of SFCs every five years under Article 243(I) is a constitutional mandate aimed at ensuring financial health and autonomy of local bodies. 
• Fiscal Devolution: The distribution of state revenues among local tiers ensures a fair allocation of funds, balancing the financial strength of local bodies.  
  • This role complements the Union Finance Commission's allocation of central funds to states and local bodies. 
• Enhancing Accountability: By evaluating  financial needs, suggesting optimal utilisation of resources, and recommending fiscal measures, SFCs can drive local governments to improve service delivery and become more responsive to citizens' needs. 
  • SFCs provide mechanisms for performance-based evaluation, which could lead to a system of rewards and penalties, fostering better governance practices at the local level. 
• Addressing Local Needs Directly: Local governance bodies impact daily life by providing services like sanitation, health, education, and infrastructure.  
  • Proper funding and financial autonomy, supported by SFC recommendations, are key to improving service quality. 
• Bridging the Functional and Financial Gap: Local bodies often face unfunded mandates due to a lack of financial resources.  
  • SFCs address this by recommending financial devolution based on responsibilities, ensuring local governments have the resources to meet their obligations. 
  • SFCs can streamline fiscal transfers, improve funding predictability, and reduce volatility with effective recommendations. 
• Political and Administrative Decentralisation: The role of SFCs extends beyond fiscal recommendations. It serves to empower local elected representatives like municipal councillors and panchayat pradhans.  

What are the Problems with State Finance Commissions (SFCs)? 

• Compliance Issues: The 15^th Finance Commission (2021-26) highlighted that only nine states have constituted their 6th SFC, even though it was due in 2019-20 for all states.
  • Many states remain stuck at the 2nd or 3rd SFC, indicating a lack of timely renewal and updates.
• Lack of Political Will: There is widespread resistance among state governments to fully devolve power and resources to local bodies, as intended by the 73^rd and 74^th constitutional amendments. 
• Resource Deficiencies: SFCs often need to start from scratch when collecting data due to a lack of readily available and organised information, further hampering their effectiveness. 
• Deficiencies in Expertise: Many SFCs are led by bureaucrats or politicians, lacking domain experts and public finance professionals.  
  • The absence of qualified technocrats diminishes the credibility and quality of SFC recommendations, which weakens their impact. 
• Opaqueness: States often fail to table Action Taken Reports (ATRs) in the legislature after SFC recommendations, reducing transparency and accountability. 
• Ignorance of SFC Recommendations: There is a pattern of non-compliance with SFC recommendations by state governments, which undermines the role of SFCs in shaping fiscal policies for local governance. 
• Peoples’ Resistance: Experts note that urban local bodies face neglect, with low political awareness and limited public engagement, which worsens the state of fiscal decentralisation. 

Way Forward  

• Compliance with Constitutional Deadline: States must form SFCs every five years as required by the constitution. Those missing deadlines should be held accountable, with regular monitoring to ensure compliance. 
• Reducing Political Resistance: State governments should be aware of the benefits of financial autonomy for local governments, leading to better services, citizen satisfaction, and accountable governance. 
• Public Finance Experts: States should ensure commissions are led by economists, finance experts, and relevant professionals, not just bureaucrats and politicians to enhance their efficiency. 
• Strengthening Local Data Systems: Local bodies should adopt modern data systems for accurate financial reporting, aiding SFCs in making informed recommendations. 
• Action Taken Reports (ATRs): States must table Action Taken Reports (ATRs) in the legislature, outlining timelines and measures to implement SFC recommendations for better transparency and accountability. 
  • Independent bodies can be tasked with evaluating the effectiveness of financial devolution and the implementation of SFC recommendations. 
• Incentive Framework: The Ministry should create a rewards system for states that excel in SFC compliance, encouraging others to improve local governance.