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Insights into Editorial: Strengthening the federal link

Insights into Editorial: Strengthening the federal link

State Finance Commissions (SFC):

The State Finance Commission (SFC) is a unique institution created by the 73rd and 74th Constitutional Amendments (CAs) to rationalise and systematise State/sub-State-level fiscal relations in India

Its primary task is to rectify growing horizontal imbalances in the delivery of essential public services to citizens. But there has been inadequate appreciation of the significance of this institution by the Union, States as well as the professional community

  • At a regular interval of 5 years, under Article 243 I of the Constitution, State Finance Commissions are to be constituted.
  • The purpose is to assign it the task of reviewing the financial position of the Panchayats and making recommendations on the sharing and the assignment of various taxes, duties etc.
  • It is also to look at grants-in-aid to be given to the Panchayats from the Consolidated Fund of the State.
  • The Conformity Acts of the Constitution Amendment Act are required to provide for the composition of the Commission, the qualification for its Members and the manner of their selection.


Importance of State Finance Commissions SFCs:

The task of the SFC to correct horizontal imbalances is extremely onerous when compared with the UFC as SFCs have to consider nearly 2.5 lakh local governments to promote minimum essential services in rural and urban areas

An SFC is the institutional agency to implement the golden rule of cooperative federalism that every citizen should be assured minimum public goods irrespective of her choice of residence

Article 280(3) has been amended to add clauses (bb) and (c) in order to take measures to augment the resources of panchayats and municipalities on the basis of the recommendations “made by the finance commission of the state”

These sub-clauses affirm the organic link between local governments and SFCs to fiscal federalism

The federalist development state of India can grow only through a process of evolutionary policy making which works towards cherished goals

Articles 243G and 243W give mandate of planning “for economic development and social justice”


Present State of State Finance Commissions:

  • Article 243I of the Constitution mandated the State Governor to constitute a Finance Commission within one year of the Constitutional Amendment came to force.
  • That means, this is to be constituted before April 24, 1994 and thereafter every five years.
  • Till date, only Assam, Himachal Pradesh, Tamil Nadu and Kerala have submitted their fifth SFC reports.
  • Many States are yet to cross the third SFC stage.
  • The seriousness, regularity, acceptance of recommendations and their implementation are conspicuously absent and moreover the composition of SFCs reveal the overwhelming presence of serving and / or retired bureaucrats rather than academics.


Problems being faced by SFCs:

For historical reasons, UFCs, particularly from the third, have chosen a restrictive role of staying away from plan and investment allocations

  • SFCs normally could not do this although some have chosen the UFC path
  • Now that the Planning Commission has been dismantled, the 15th UFC has to spell out its decision-making domain

It is important to disabuse the notion among several politicians, policymakers and even experts that SFCs and the local governments they deal with have an inferior constitutional status when compared to the UFC

  • The SFC is undoubtedly modelled on the UFC created under Article 280 and exemplified in Articles 243I and 243Y
  • While the UFC is tasked with rectifying vertical and horizontal imbalances at the Union-State level, the SFC has to perform the same with reference to State/sub-State-level institutions

The Constitution treats a local government on a par with a State government, especially when it comes to sharing of financial resources

SFCs face a crucial problem of reliable data:

  • The financial reporting system of the Union and States is well laid down
  • On the other hand, local governments with no proper budgetary system are in deep disarray


Constitutional Provisions Ignored by The States:

Articles 243G and 243W talks about planning for economic development and social justice, Article 243ZD mandates that every State constitute a District Planning Committee for spatial panning and environmental conservation at the sub-State level.

That means, the Constitutional Amendment left the task of adequately empowering the local Govts. to discharge constitutional obligations to the States.


Failure of Union Finance Commissions (UFCs):

UFCs have failed to play a hand-holding role in placing decentralised governance properly in the cooperative federal map of India.

The hard truth is that no UFC has done its homework in reading and analysing SFC reports.

Without presenting a consolidated account of the reality at the sub-State level or highlighting which report went wrong, where and how, no UFC can legitimately guide States or contribute to improving the goals of constitutional amendments.


Way Forward:

All the terms of reference of UFCs (since the 11th)iterate the need for suggesting measures to augment the resources of panchayats and municipalities as a core task.

Both centre and state must sit together to make a concrete approach to redeem the situation and work towards a good local governance system.

Their well-designed grant scheme to incentivise States was not given a fair trial.

Till now, SFCs have not been provided with the necessary environment to play their rightful role in Indian fiscal federalism. A great opportunity to build regional equity in India should not be undermined but to enhance the opportunity towards the Fiscal and Cooperative Federalism.