The State Finance Commission (SFC) is a unique institution created by the 73rd and 74th Constitutional Amendments (CAs).
But there is an undermined recognition of the potential of State Finance Commissions.
What was the mandate?
The 73rd and 74th CAs rationalised and systematised State/sub-State-level fiscal relations in India.
It was primarily to rectify growing horizontal imbalances in essential public services delivery.
Article 243I of the Constitution mandated the State Governor to constitute a Finance Commission.
This was to be done within one year of the CAs (before April 24, 1994) and thereafter every five years.
What are the concerns?
Reports - As per the mandate, the fifth generation SFCs ought to have submitted reports by now.
But till date, only Assam, HP, TN 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.
Role - The Union Finance Commissions (UFC) has been widely acknowledged as a professional and quasi-judicial body.
The UFC exhibits seriousness, regularity, acceptance of recommendations and their implementation.
But these are evidently absent when it comes to State Finance Commissions (SFCs).
Clearly, honouring the Constitution has become a matter of convenience.
Personnel - The SFCs' compositions are largely of serving and/or retired bureaucrats rather than academics.
The State governments bear a large share of the blame for this.
Overall, there has been an inadequate appreciation of the significance of SFC as an institution.
This is the case with the Union, States as well as the professional community.
Why are SFCs crucial?
Status - The SFC is undoubtedly modelled on the UFC created under Article 280.
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.
This is especially the case when it comes to sharing of financial resources.
Role - SFCs have to promote minimum essential services in rural and urban areas.
Hence, SFC is the institutional agency to implement the golden rule of cooperative federalism.
Accordingly, every citizen should be assured minimum public goods irrespective of her choice of residence.
Federalism - UFC is mandated to suggest measures to augment the resources of panchayats and municipalities.
This is essentially on the basis of the recommendations made by the SFCs.
This affirms the organic link between local governments and SFCs to fiscal federalism.
As UFC reduces inter-State disparities, the SFCs reduce intra-State disparities through balanced distribution criteria.
It is only with both the UFC and the SFCs that Indian federation becomes sustainable and inclusive.
What are the limitations for SFCs?
Task - The task of SFCs to correct horizontal imbalances is extremely burdensome than the UFC.
This is because SFCs have to consider nearly 2.5 lakh local governments.
Data - 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.
So SFCs face a crucial problem of reliable data.
Support - Several sufficient conditions remain unfulfilled in the case of SFCs.
SFCs have not been provided with the necessary environment to play their rightful role in Indian fiscal federalism.
Perception - Unlike UFCs, the SFCs face attitudinal limitation from within.
SFCs and local governments are seen to be of inferior constitutional status than the UFC.
This is a prevailing notion among several politicians, policy makers and even experts.
What is the way forward?
The federalist development state of India can grow only through a process of evolutionary policy making.
The States are tasked with empowering local governments to discharge constitutional obligations.
SFCs - Unlike the UFC, no SFC can easily ignore the following:
Articles 243G and 243W - planning “for economic development and social justice”
Article 243ZD - mandates that every State constitute a district planning committee for spatial panning and environmental conservation at the sub-State level
UFC - UFCs have failed to play a central role in ensuring decentralised governance.
No UFC has done its homework in reading and analysing SFC reports.
The UFC has to present a consolidated account of the reality at the sub-State level.
It should also highlight which report went wrong, where and how.
These are essential for the UFC to legitimately guide States and contribute to improving the goals of constitutional amendments.
