- Most states fail to adhere to the constitutional obligation of constituting State Finance Commissions at regular intervals.
- Several other factors hamper the functioning of State Finance Commissions, an important body to devolve finances between states and local bodies. Lack of expertise, space, and data are few of among many.
- There is a renewed push to ensure states constitute SFCs as the Union Finance Commission makes it mandatory to release local grants.
This year marks 30 years since India began decentralising governance and empowering local bodies in rural and urban areas through constitutional amendments. As part of this process, one of the mandates for states was to create a State Finance Commission that would review the financial position of local bodies every five years and decide how the revenue is to be distributed between state and local government functionaries.
By this time, all the states should have constituted the Sixth Finance Commission which operates over the years 2021-22 to 2026-27. However, so far, only nine states have constituted 6th SFC, of which only two are active.
This delay was highlighted in a report by the standing committee on rural development and panchayati raj tabled in Lok Sabha on March 14 which said, “Out of 26 states, for which information was given by the Ministry, only nine states have constituted 6th State Finance Commissions, and out of them, only two are active. Some states have not even constituted 4th and 5th Finance Commissions.”
As per the report, Gujarat, Jharkhand, and Goa have constituted just three (out of six) SFCs, running until 2011, while Karnataka, Chhattisgarh, and Tripura have constituted four SFCs. Arunachal Pradesh has constituted just two SFCs.
Chairman of the Institute of Social Science, George Mathew, said that the constitution of SFCs is one of the most important provisions of the 73rd and 74th amendments to the Indian Constitution. The Commission is supposed to review the finance of states and local bodies and facilitate the decentralisation of government power. However, SFC is the most neglected aspect of the 73rd and 74th amendments, he said, adding that not a single state has done what was expected by the Constitution of India. To some extent, Kerala has tried to move forward, but no other state has shown seriousness regarding SFCs, he added.
The effort towards democratic decentralisation, by devolving the function and resources to local bodies, has a long history. India took the first definite step on the path to ensure effective local governance in the 1990s. After several parliamentary committees and rejection, policymakers finally changed the constitution to empower the Panchayati Raj Institutions (PRIs) and Urban Local Bodies (ULBs) in December 1992. With the notification of these laws in 1993, the parliament devolved 29 subjects to PRIs and 18 subjects to ULBs. The act mandated regular elections of the local body after every five years.
With the same amendments, Article 243-I was introduced, which talks about the constitution of the SFC to review the financial position of states and panchayats and recommend measures. It says, “The Governor of a State shall, as soon as may be within one year from the commencement of the Constitution (Seventy-third Amendment) Act, 1992, and thereafter at the expiration of every fifth year, constitute a Finance Commission to review the financial position of the Panchayats and to make recommendations to the Governor..”
The recommendations by SFCs were supposed to be the base on which the Union Finance Commission (UFC) was to make further recommendations to augment local government finances. However, most state governments did not constitute the SFCs in time and did not give due importance to strengthening this critical constitutional mechanism, admits the 15th Finance Commission report.
Talking about India’s journey of decentralising power and the state of SFCs,former National Institute of Public Finance and Policy (NIPFP) professor, Tapas Sen, says, “We are nowhere compared to what was envisaged 30 years ago through the constitutional amendments.” He says there is clear resistance to devolving power to local bodies. The situation in urban bodies is worse than the rural ones because there is almost no political awareness in cities, and people keep themselves far from political activities, he said.
An economist Pinaki Chakraborty also feels that a considerable amount of time has passed, almost three decades, after the 73rd and 74th Amendments without a meaningful progress of decentralisation barring a few states. Local government as an institution is still evolving. Chakraborty was part of a study aimed to examine the state of SFCs in 2019.
Failing the whole idea
A 2019 study on the state of SFCs, conducted by NIPFP, examined 25 states and found several issues hampering the functioning of the constitutional body.
Underlining the delay in forming SFCs, the report highlighted issues such as lack of office space, technical staff, and basic office infrastructure like computers, office furniture, and other supporting logistics, which resulted in considerable time loss.
Similarly, the non-availability of data related to local government also hampers the workings of SFCs. Every time an SFC is constituted, it has to start from scratch to collect data, the study, commissioned by the UFC, says.
The report also highlights lack of expertise, noting that the majority of the members and chairpersons of the SFCs are bureaucrats and politicians. ” This puts limitations on the ability of the SFC to act as an autonomous body to make recommendations in a free and independent manner, as has been envisioned in the constitution,” says the report. The lack of expertise among people at the helm of SFCs has echoed in several other UFCs reports.
This report also discusses the differences in treating divisible pools (revenue shared between state and local bodies) by individual SFCs.
After SFCs submit their report, states are constitutionally bound to table Action Taken Report (ATR) before the assembly. There are several examples where states simply failed to put ATR before assembly. Non-availability of data on the finances of local governments and infrastructure support is hampering the quality of SFC work in many states.
When asked about these issues, one of the author of the report, Pinaki Chakraborty, while talking to Mongabay India, says that the most important issues are the timely constitution of SFC, ATR, and justification if the state government does not accept any recommendations of the SFC. Then, it is open for people to evaluate the whole process of sub-state decentralisation.
A professor with NIPFP, Lekha Chakraborty says that constituting SFCs with reputed public finance experts as the chairpersons is crucial for the credibility of recommendations. The composition of SFC members needs to be technocrats and domain experts as non-political appointments will strengthen the credibility of recommendations.
A push: Will it work?
Recently, an advocate by profession, G.V. Reddy filed a public interest litigation (PIL) in Andhra Pradesh high court against the state government for delaying the constitution of the SFC.
The petitioner argued that even though more than two years have lapsed after the term of the Fourth Finance Commission ended, the state government had not constituted the Fifth Finance Commission. In his view, it leads to the local self-governments being deprived of their legitimate share from the Consolidated Fund of the State. Consequently, they are unable to perform their functions effectively. Reddy is a spokesperson of the Telugu Desam Party (TDP).
He filed the PIL in June 2022 and on March 20, 2023, the state government finally constituted the fifth finance commission in Andhra Pradesh. It took nine months for the work they should have done automatically, said Reddy, adding that it shows the reluctance of the government to adhere to the constitutional needs.
When asked how it hampered the report of UFC, Pinaki Chakraborty says that in the absence of reports by SFC, UFCs rely on their own assessment. The process of decentralisation would have benefited if SFCs had given timely reports.
The union finance commissions have been giving a renewed push to ensure states take finance commissions seriously. While the 14th finance commission (operating from 2015-2020) recommended the timely constitution of SFCs and talked about institutional support, the 15th finance commission (operating from 2020-2025) announced that from 2024-25, grants will be released only to the states that comply with the constitutional formation of the SFCs. The central government is organising workshops for SFCs.
However, the Ministry of Panchayati Raj confirms in a statement that appeared on March 9, that there are miles to go to ensure SFCs do their crucial function to empower local bodies. Many experts said there is a lack of political will to empower the local self-governance.
About the future pathway, Lekha Chakraborty says that SFCs are constituted to reduce ad hocism and arbitrariness in the fiscal transfers from states to local bodies. The delay in constituting SFCs might result in increased volatility in the flow of funds. The “unfunded mandates” is a significant issue at the local level. The asymmetry between functions and finance results in imbalances between state and local bodies as well as across local bodies.
Whether the mandatory provision of the 15th Finance Commission to transfer money will work, Chakraborty says that a “charter” for constituting SFC on a timely basis and its suggested composition and mandate can give a renewed emphasis. She predicts that the 16th Finance Commission which will be in operation from 2025, may come up with such a charter.
She also talks about the importance of data and what 16th FC can do about it. “Local government data creation is crucial. Digitising the data in a comparable classification code and accounting is crucial for building local-level data across States in India. The uniform code for data accounting is absent in India. The recent RBI report on Municipal Finances has flagged this issue. It needs to be given utmost seriousness in decentralisation deliberations by the 16th FC,” she added.
Banner image: An open panchayat near Narsingarh in Madhya Pradesh. With the 73rd and 74th amendments, India took the first definite step on the path to ensure effective local governance in the 1990s. Photo by Suyash Dwivedi/ Wikimedia Commons.