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Syllabus: GS paper 2
What are the functions performed by the State Finance Commissions (SFC)? What are the major concerns with SFC? Suggest some measures to improve their role?
What is the issue?
- As mandated by the 73rd Amendment Act 1992 the States have not been setting up their State Finance Commissions (SFC) every five years.
What is the constitutional mandate?
- The state finance commissions were added by 73rd amendment act.
- They have been enshrined in article 243-I and 243-Y in Part IX A and IX B and are constituted by Governor every five years.
- Their Primary concern is to suggest ways and means to strengthen the institutions of local governance. (Panchayati raj institutions and Urban local bodies)
- They recommend principles and methodology as regards the devolution of funds to PRI’s and ULB’s.
- The recommendations of the state finance commissions include:
- The distribution between the State and the local bodies of the net proceeds of the taxes, duties, tolls and fees leviable by the State
- Determination of the taxes, duties, tolls and fees levied or appropriated by the local bodies
- The grants-in-aid to the local bodies from the Consolidated Fund of the State
- Measures needed to improve the financial position of the local bodies
- The governor is required to place every recommendation made by the SFC and actions taken by the state governments on it before the state legislature.
What are the concerns?
- There are many cases where the recommendations of an SFC have neither been formally accepted by the State government, nor was the SFC report laid before the State legislature.
- There are also instances where the State government, despite having accepted its SFC’s recommendations fully or partially, has not implemented them.
- These developments have affected empowerment and finances of local bodies.
- States like Manipur witnessed a gap prevailed between the recommendation of successive SFCs and the State government’s actual fund transfer to its hill districts’ local bodies.
- It results in accentuating the grievances of hill tribes against their counterparts in the plains.
What role do the central finance commissions play?
- Central finance commissions, while recommending on the overall devolution from the central pool of divisible resources to the States, factor in recommendations given by SFC to their respective states.
- The 14th FC had recognised that governing cities is becoming a major challenge because of shortage of finances, weak institutional framework and lack of capacity for service delivery.
- It observed that the rural local bodies were in many cases not equipped to perform their core functions.
- It recommended a total devolution of Rs.2,87,436 crores for all the local bodies, constituting an assistance of Rs.488 per capita per annum at an aggregate level.
- The present 15th Finance Commission (FFC) is also tasked “to consider provision of grants-in-aid to local bodies for basic services, including quality human resources, and implementation of performance grant system in improving delivery of services”.
- The FFC has to recommend specifically the amount to be devolved to the States during its award period (2020-25) for local bodies.
What should be done?
- As per the existing system, all funds devolved to States on recommendations of CFC are directly transferred to State governments’ treasuries.
- The Fifteenth Finance Commission should recommend that the funds earmarked for PRIs and ULBs, should be managed through public financial management system.
- It would track flow of funds on a real-time basis and will eliminate delays in transfers to local bodies.
- A portion of the earmarked funds for PRIs and ULBs could be distributed as incentive to States which constitute their SFCs as per the constitutional norm.
- This should empower them to raise tax and non-tax revenue in areas specified by FFC and SFCs.
- Local bodies of States performing better will gain, which should induce the other State governments to be more conscious of their responsibilities.
- Local bodies are the interface between State institutions and the public towards obtaining basic services.
- Hence, the 15th Finance Commission must incentivise the States to constitute their SFCs and empower their local bodies.
- The role of governors is also crucial as a benevolent institution of oversight and ensuring vibrant functioning of local bodies.
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