A recent study on local governance in India has uncovered a troubling pattern. Only seven states have managed to establish all seven State Finance Commissions since the system began in 1992-93. This finding comes from a detailed report published by Janaagraha, a think tank focused on urban and rural governance.
Which States Have Performed Well?
The report identifies the seven compliant states as Rajasthan, Haryana, Tamil Nadu, Bihar, Kerala, Assam, and Himachal Pradesh. These states have successfully constituted every SFC since Parliament passed two crucial constitutional amendments. Those amendments aimed to strengthen local governments across the country.
Widespread Failure to Prioritize Local Funding
The study highlights a major failure by most state governments. They have not made the institutionalization of State Finance Commissions a priority. This is a significant problem because SFCs play a vital role. They decide how finances are devolved to municipal corporations and other local bodies.
Researchers found chronic delays in forming these commissions. This weakness starts right from their inception. In many cases, states constituted SFCs with very short initial tenures. Some commissions were given only six months to operate. They then continued their work through repeated extensions, creating instability.
A Stark Contrast with the Central Finance Commission
The situation at the state level stands in sharp contrast to the central government's approach. The Finance Commission established by the Centre operates with a fixed two-year term. This provides predictability and stability.
Despite being the most predictable funding source for cities and towns, SFCs remain neglected. Their empowerment is uneven across different states. The Janaagraha report calls for a major change. It argues that State Finance Commissions should be given the same standing and respect as the central Finance Commission.
Key Recommendations for Reform
The think tank proposes several concrete steps to fix the system. Its recommendations include:
- Fixing clear timelines for constituting State Finance Commissions.
- Ensuring adequate staffing and robust data systems for these bodies.
- Requiring state governments to present Action Taken Reports in their assemblies within six months of receiving SFC recommendations.
- Mandating clear explanations for why proposals are accepted or rejected.
Why SFCs Are So Crucial for Local Governments
The report underscores the enormous financial importance of State Finance Commissions. On average, the fund transfers from state governments to local bodies, as recommended by SFCs, are nearly four times larger than those recommended by the central Finance Commission. This makes SFCs absolutely vital for the functioning of local governments.
This role is especially critical given the financial weakness of most urban local bodies. Their own-source revenues are insufficient. According to the report, municipal bodies' own revenues cover only 60 to 70 percent of their recurrent expenditure. They depend heavily on state and central grants for capital investments and even some operational spending.
The study also notes that 72 percent of urban infrastructure is financed by central and state governments. Scheme funding is often tied to specific sectors, and its continuity cannot be guaranteed. In comparison, the devolutions recommended by Finance Commissions are meant to provide predictable, flexible, and autonomous funding to meet local needs.
The Only Predictable Funding Source
In many states, SFC grants represent the only predictable source of funds for municipal bodies. This money is not just for creating new assets. It is also essential for paying staff salaries and covering operational and maintenance expenses.
The report provides a clear example from Karnataka. There, SFC grants accounted for over 75 percent of total receipts in smaller municipalities. In larger cities, these grants made up 40 to 50 percent of total receipts. This demonstrates the heavy reliance local bodies have on these funds for their very survival.
The findings paint a clear picture. While the framework for empowering local governments exists, its implementation is deeply flawed. Most states have failed to uphold their responsibilities, leaving cities and towns financially vulnerable and dependent on unpredictable funding streams.
