State Finance Commissions & Fiscal Transfers

Constitutional Framework & Roles of SFCs and CFCs

Article 243-I of the Constitution mandates the Governor of a State to constitute an SFC every five years. The SFC’s recommendations are non-binding, but the State Government is expected to act upon them after explaining any deviation. Similarly, Article 280 establishes the CFC, which determines the principles governing the distribution of tax revenues between the Union and the States, and also recommends measures to augment the Consolidated Fund of States to supplement the resources of Panchayats and Municipalities. The CFC relies heavily on the data and recommendations provided by the SFCs to formulate its recommendations for local bodies.

Issues Plaguing State Finance Commissions

• Lack of Political Will: State governments often view SFCs as a nuisance, fearing a loss of control over financial resources. This results in delayed constitution of SFCs, inadequate staffing, and limited budgetary support.
• Data Deficiencies: SFCs often struggle to obtain reliable and comprehensive data on the finances of local bodies from State Governments. This hinders their ability to make informed recommendations.
• Non-Implementation of Recommendations: Even when SFCs submit reports, State Governments frequently ignore or selectively implement their recommendations, often citing financial constraints.
• Limited Expertise: SFCs often lack members with sufficient expertise in public finance and local governance.
• Short Tenure & Discontinuity: The five-year tenure of SFCs often leads to discontinuity in policy and a lack of long-term vision.

Impact on Central Finance Commission Recommendations

The apathy towards SFCs directly impacts the quality of recommendations made by the CFC. The CFC relies on SFC reports to understand the ground realities of local finances. When SFC reports are delayed, incomplete, or ignored, the CFC is forced to rely on broader, less accurate data, leading to:

• Inaccurate Assessment of Local Needs: Without reliable data from SFCs, the CFC may underestimate the financial needs of local bodies.
• Ineffective Devolution of Funds: The CFC’s recommendations for fiscal transfers may not be tailored to the specific needs of different states and local bodies.
• Weakened Local Governance: Insufficient financial resources hinder the ability of local bodies to effectively deliver essential services and implement development programs.

Examples of Impact

The 15th Central Finance Commission (2020-2026) noted that the quality of reports submitted by SFCs varied significantly across states. Several states submitted reports that were superficial and lacked detailed analysis. This forced the CFC to rely heavily on its own independent assessments, which may not have fully captured the nuances of local finances. For instance, the 14th CFC (2015-2020) observed that many states had not fully implemented the recommendations of the 13th SFC, leading to a widening gap between the financial needs of local bodies and the resources available to them. Similarly, the 15th CFC highlighted that states like Uttar Pradesh and Bihar consistently lagged in constituting and utilizing SFCs effectively.

Strengthening State Finance Commissions: Way Forward

• Constitutional Amendment: Consider amending the Constitution to make the recommendations of SFCs binding on State Governments, or to establish a mechanism for parliamentary oversight.
• Capacity Building: Invest in training and capacity building for SFC members and staff, equipping them with the necessary skills and expertise.
• Data Standardization: Develop a standardized framework for data collection and reporting by local bodies, ensuring accuracy and comparability.
• Increased Funding: Provide SFCs with adequate budgetary support to conduct thorough research and analysis.
• Transparency & Accountability: Make SFC reports publicly available and establish mechanisms for public scrutiny and accountability.
• Inter-Commission Coordination: Foster greater coordination between CFCs and SFCs, ensuring a seamless flow of information and a shared understanding of local finance issues.