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State Finance Commissions

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In India, decentralization reforms, aimed at empowering local people through local governments, assumed significance in early 1990s. Though the Panchayats and the municipalities (rural local bodies and the urban local bodies) existed even before the 73rd and 74th amendment of the Constitution in the year 1993, these amendments provided an impetus to the decentralisation process through a system of self-government for the panchayats and municipalities and devolve greater powers, functions and authority to them. It also envisaged the panchayats and municipalities as an institution of self-government. These amendments also underscored the organic link in the public finances of the multi-layered federal polity in India. The devolution of financial resources to these bodies was ensured through periodic constitution of the State Finance Commissions (SFCs).

Articles 243 (I) and 243 (Y) of the Constitution spelt out the task of SFCs. Accordingly, SFCs are required to recommend (a) the principles that should govern the distribution between the State on the one hand and the local bodies on the other of the net proceeds of taxes, etc. leviable by the state and the inter-se allocation between different panchayats and municipalities, (b) the determination of taxes, duties, tolls and fees which may be assigned to, or appropriated by the local bodies, and (c) grants-in-aid from the consolidated fund of the State to the local bodies. SFCs are also required to suggest the measures needed to improve the financial position of the panchayats and municipalities. The importance of the SFCs in the scheme of fiscal decentralization is that besides arbitrating on the claims to resources by the state government and the local bodies, their recommendations would impart greater stability and predictability to the transfer mechanism.
So far, three SFCs have submitted their reports in most of the States. These cover different time period. The convention established at the national level of accepting the principal recommendations of the central finance commission without modification, is not being followed in the states. Often, even the accepted recommendations are not fully implemented due to resource constraints. There is no synchronization of the periods covered by the reports of SFCs with that of the central finance commission, which affects the central finance commission in assessing the resource required to state governments to supplement the resources of the panchayats and municipalities.


  1. Reports of the Tenth, Eleventh, Twelfth and Thirteenth Finance Commission.
  4. 10.2)
  8. RBI’s Report on State Finances – A study of Budgets 2010-11

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