Editorial✍ Hindu Edi Prelims cum Mains

Strengthening the federal link

State Finance Commissions:

  • 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.

To be constituted every 5 years:

  • Article 243I of the Constitution mandated the State Governor to constitute a State Finance Commission within one year of the 73rd and 74th Amendments (before April 24, 1994).
  • Thereafter, SFCs are to be constituted every five years.
  • This means fifth generation SFCs ought to have submitted reports by now.

But States have been lagging in this:

  • 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 large majority has violated the mandate of the Constitution with impunity.


SFCs are not being as professional as Union Finance Commission:

  • The UFC has been widely acknowledged as a professional and quasi-judicial body when compared to the SFC.
  • The seriousness, regularity, acceptance of recommendations and their implementation which characterise the Union Finance Commissions (UFCs) are conspicuously absent when it comes to SFCs.

SFCs filled with Bureaucrats:

  • A cursory survey of the composition of SFCs would reveal the overwhelming presence of serving and/or retired bureaucrats rather than academics.
  • The States have to bear their share of the blame for this.


Comparision of UFCs and SFCs:

  • In order to properly compare UFCs and SFCs, certain facts have to be put in perspective.
  1. SFCs are as important as UFCs:
  • It is important to stop the notion among several politicians, policy makers etc. that SFCs and the local governments they deal with have an inferior constitutional status when compared to the UFC.
  • The SFC is 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.
  1. SFCs have tough task handling distribution across large number of panchayats:
  • It is not adequately appreciated that 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.
  • By implication, 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.
  1. UFCs and SFCs both key for sustainable federation:
  • The Union Finance Commission is also mandated to recommend measures to augment the resources of panchayats and municipalities on the basis of the recommendations made by the finance commission of the state.
  • This establishes the organic link between local governments and SFCs to fiscal federalism.
  • It is only when inter-State disparities are reduced by the UFCs through their inter-se distribution criteria and intra-State disparities are reduced by SFCs through the horizontal distribution criteria, that the Indian federation becomes a sustainable and inclusive nation-state.
  1. Improper budgetary systems at local levels restrict the SFCs:
  • UFCs had no data problem in reviewing the finances of the Union and States. 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 and, because of that, SFCs face a crucial problem of reliable data.


UFCs failed to support local governments:

  • UFCs have not doing enough work in reading and analysing SFC reports.
  • Without presenting a consolidated account of the reality at the sub-State level or highlighting problems in state reports, no UFC can legitimately guide States towards improving local government institutions.
  • 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.
  • But barring the 13th FC, hardly any FC made any concrete approach to work towards a good local governance system.
  • Even 13th FCs well-designed grant scheme to incentivise States was not given a fair trial.



  • In sum, SFCs have not been provided with the necessary environment to play their rightful role in Indian fiscal federalism.
  • As a result, a great opportunity to build regional equity in India has been undermined.



GS Paper II: Polity

Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: