What's rendering state Finance Commissions so ineffective and toothless?

While the 13th Finance Commission gave a template for preparing the reports of SFCs, it was not acted upon because these are not mandatory recommendations

It is so commonplace now that you, as a consumer of news, won’t even pay it a second notice. Protests by municipal and sanitation workers, and teachers in rural areas, among others for unpaid or much-delayed salaries happen nearly every month in some part of the country or another.

These are just some examples of how any disruption in the flow of funds to local bodies like panchayats and municipalities can impact third-tier governance and administration. And at the heart of the subject are state Finance Commissions (SFCs).

According to the 15th Finance Commission and studies conducted by think tanks, barring a few states, most of the SFCs have been rendered ineffective and toothless by the state governments, and many have not set up new SFCs after the stipulated five-year period. This impacts the flow of funds and the necessary devolution of powers to local bodies.

In India, the “SFCs need to play a much more critical role in recommending taxes assigned to municipalities and other local governments and related financial relations between the States and their municipalities,” the 15th Finance Commission had said in its report for the period 2021-2026. It added that there is a need to ensure consistency in the operation of SFCs Commissions and to ensure their continuing collaboration with central Finance Commissions.

Article 243-I of the Constitution of India requires SFCs to be appointed at the 'expiration of every fifth year'. Thus, the mandate given to an SFC should be applicable only for a period of five years and should not be extended. The 15th FC noted that in practice, this has not happened.

“SFCs face significant challenges in the form of poor administrative support, inadequate resources for their smooth functioning and the delayed placement of action taken reports before State legislatures,” the 15th FC said.

It said that most state governments did not constitute them in time and did not give due importance to strengthening this critical constitutional mechanism. (see table)

Ajay Narayan Jha, former Finance Secretary and member of 15th FC told Business Standard that states get away by extending the recommendations of previous Finance Commissions. He said that there are many reasons why states may want to keep SFCs ineffective.

One is that states may not want to be preempted by the SFC on panchayat funds. There is politics involved here as states may want third-tier devolvement power for themselves.

“States are not sure whether they should actually implement Finance Commission recommendations which give a lot of leeway to local bodies,” Jha said, adding that the state panchayat laws are made in such a way that they sort of override a lot of the recommendations and delegations of power, functions, funds etc, which should logically go to panchayat and local bodies.

“If you have to have a third tier of the government, which is empowered and which has been devolved adequate functions at least at the local level, then you need state FCs. There are certain things which are best planned, executed, implemented, monitored at the local level and therefore, it is time that we took it seriously and devolved and make them accountable,” Jha said.

While the 13th FC had given a template for preparing the reports of the SFCs, this was not acted upon because these are not mandatory recommendations.

“The 15th FC, therefore, instituted a clause which says that if states don't constitute and act upon its report, including setting up new SFCs, the flow of funds from centre to states may be impeded”, Jha said.

And it is not just about SFCs being ineffective. The way states keep some of the powers to themselves takes different forms.

According to a report by the National Institute of Public Finance and Policy, states often pay lip service to SFCs. The report, whose authors include noted economist Pinaki Chakraborty, flagged the non-availability of office space, technical staff and basic facilities like computers, office furniture etc.

“Additionally, workings of the commissions have also been adversely affected by non-availability of data relating to local governments, delays in the appointment of chairpersons/members. In almost all states, successive SFCs are faced with the same set of problems: non-availability of data, office space and technical staff. All this resulted in SFCs taking more time to submit their reports,” the report stated.

Entity	Number of Finance Commissions Constituted so Far
Central Government	15
Assam, Bihar, Punjab, Rajasthan	6
Haryana, Himachal Pradesh, Kerala, Madhya Pradesh, Maharashtra, Odisha, Sikkim, Tamil Nadu, Tripura, Uttarakhand, Uttar Pradesh	5
Andhra Pradesh, Karnataka, West Bengal	4
Chhattisgarh, Goa, Gujarat, Jharkhand, Manipur	3
Arunachal Pradesh, Mizoram	2
Erstwhile J&K, Telangana	1

Source: 15th Finance Commission report