General Studies Paper 2 (Indian Polity): State Finance Commission

State Finance Commission

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Syllabus: General Studies Paper 2 (Indian Polity)


Highlight the importance of State Finance Commission in strengthening fiscal federalism in India. Do you agree with the view that they have not been provided with the necessary environment to play their rightful role?



The State Finance Commission (SFC) is a unique institution created by the 73rd and 74th Constitutional Amendments to rationalize and systemize state/sub-state level fiscal relations in India. It has been enshrined in Articles 243-I and 243-Y of the Indian Constitution and are constituted every 5 years by respective Governors in each state.


Importance of State finance commission in strengthening fiscal federalism in India:

  • It recommends the principles that govern-
    • Distribution between the State and the local bodies of the net proceeds of the taxes, duties, tolls and fees livable by the State.
    • Determination of the taxes, duties, tolls and fees levied or appropriated by the local bodies.
    • 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.
  • Its primary task is to rectify growing horizontal imbalances in the delivery of essential services to citizens.

Challenges faced by the State Finance Commissions:

It is the responsibility of the states to provide the necessary environment to the SFC to play their rightful role. However, there is an inadequate appreciation of the significance of this institution by the Union, States as well as the professional community, which is evident from the following:

  • Delay in the formation of the SFCs: Only few states (Assam, H.P, Tamil Nadu and Kerala) have constituted them at the prescribed interval, since the enactment of 73rd and 74th Amendment Acts.
  • Lack of expertise: They are dominated by serving/retired bureaucrats rather than academicians or those who have expertise in public finances.
  • Lack of reliable field level data.
  • UFCs (except 13th) have not taken adequate steps to strengthen SFCs.
  • There are cases where the recommendations of an SFC have neither been formally accepted, nor the SFC report laid before the State legislature e.g. Manipur.
  • No systematic mechanisms are in place to preserve and pass on institutional knowledge and institutional memory from one commission to another commission.


Way forward:

Lack of systematic mechanisms hindrance the working of state finance commission. As a result, the necessary environment for viable functioning of the SFC has not been conducive for them to play a meaningful role. However, following measures need to be adopted for them to play a rightful role in the existing scheme of fiscal federalism in India:

  • Evolve uniform operational guidelines for constitution and composition of the SFCs.
  • DPCs should act as data-hub for SFCs and development planning.
  • Synchronization of State and Central Finance Commission reports for synergized results.
  • Evidence Based Action Taken Reports for better outcome orientation.



Reforming the working of the State Finance Commissions by treating them on par with the Union Finance Commission as equal in terms of their Constitutional status would go a long way in rectifying the horizontal financial imbalances among the local bodies, thereby empowering them.


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