Summary – The Hindu – Strengthening the federal link

(Practice Question: The State Finance Commissions, despite being given a prominent fiscal role in the Constitution have not realized its objectives. Comment. – 150 words)


Author: M.A. Oommen


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.

Constitutional status of the SFCs:

Article 243I of the Constitution mandated the State Governor to constitute a Finance Commission within one year of the 73rd and 74th CAs (before April 24, 1994) and thereafter every five years.

Role/Importance of the SFCs:

Its primary task is to rectify growing horizontal imbalances in the delivery of essential public services to citizens. While the Union Finance Commission 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.

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, 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.

As per Article 280(3) clauses (bb) and (c) the measures to augment the resources of panchayats and municipalities must be taken on the basis of the recommendations “made by the finance commission of the state”.

SFCs form 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.

How the SFCs have been performing:

There has been inadequate appreciation of the significance of this institution by the Union, States as well as the professional community. Post the 73rd and 74th Constitutional Amendments, fifth generation SFCs ought to have submitted reports by now, with around 140 reports available in the public domain. 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. The seriousness, regularity, acceptance of recommendations and their implementation which characterise the Union Finance Commissions (UFCs) are conspicuously absent when it comes to SFCs. The UFC has been widely acknowledged as a professional and quasi-judicial body when compared to the SFC.

Why have the SFCs not performed upto the mark?

UFCs have failed to play a hand-holding role for the SFCs 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. 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 has been undermined.

Some other reasons include: 

  • the wrong notion among several politicians, policy makers and even experts that SFCs and the local governments have an inferior constitutional status when compared to the UFC.
  • Limited resources to SFCs to address their responsibilities. SFCs have to consider nearly 2.5 lakh local governments to promote minimum essential services in rural and urban areas.
  • Local governments with no proper budgetary system are in deep disarray and, because of that, SFCs face a crucial problem of reliable data.

Read the full article at The Hindu.