Strengthen functioning of State Finance Commissions to ensure financial decentralization at the local governance level - Participatory Research in Asi

More than 16 years after they were constituted under the 73rd Amendment Act, 1992, operational deficiencies still mar the functioning of State Finance Commissions. At a recent National Consultation on State Finance Commissions (SFCs) organized by the Participatory Research in Asia (PRIA) & Ministry of Panchayati Raj, several participants from different states reviewed the present condition of the SFCs and suggested ways to strengthen the functioning at the local governance level.

SFC’s are constitutional bodies created to review the financial status/conditions of Panchayats and municipalities and to suggest, measures for strengthening these bodies. Following the 73rd and 74th constitutional amendments as means of ensuring decentralization of governance in India, articles 243(I) and 243(Y) of constitution were structured to further the process, whereby the SFCs are also responsible to recommend on issues like distribution of taxes, duties, tolls and fees between state and the local bodies and their allocation between Panchayats and Municipalities. However, in the present context there are number of issues to be addressed regarding their effective functioning.

The national consultation attended by some eminent resource persons from the Union and State governments, produced some grim figures from the SFCs report on Panchayati Raj Institutions like in terms of share of local taxes in the total revenue collected, six states are collecting less than 5%, 8 states falls in 5 to 25% category, whereas 4 states are collecting more than 25%. Revenue generation is very poor and Panchayati Raj Instituitions (PRIs’) dependence on external resources is still continuing leading to a decline in buoyancy of own revenue. PRIs continue to depend heavily on the upper tiers of the government for meeting the expenditure with the average PRIs revenue being below 1% of states own revenue. Fiscal autonomy of PRIs improved but again after heavy dependence on upper higher tiers of the government.

Most of the participants at the consultation felt that although SFCs are supposed to have dedicated staff working for it, it takes several months to provide the constituted SFCs with the required human power and there is also lack of a standard framework that could guide the constitution and composition of SFCs. Further, due to lack of permanent secretariats in most of the SFCs, the secretary level officials of state government are often assigned additional charges for SFC. Their engagement in other responsible positions of state government restricts them to spend quality time with the SFCs affecting their efficiency.

It was also mentioned that both the quality and time of submission of reports of SFCs was also poor, with SFCs in many states given extensions for this purpose. In most cases the reports were based on generalized observations in terms of content and analysis of the existing financial condition limiting their relevance for further action and consideration. However, once the report containing recommendations of the SFCs were submitted, they often faced delays from the Legislature of State. Most of the time the report simply gathers dust for several months thus loosing its relevance and importance. The Action Taken Report (ATR) that follows the action to be taken on the basis of the recommendation also looses its value in this course.

Factors like these are major hurdles in the path of effective functioning of SFCs and unless they are addressed, SFCs will not be able to perform the role of public finance devolution in India. In order to strengthen the SFCs, it is imperative to deal with the existing problems in the present system and to come to a consensus for measures and ways that could be adopted to strengthen its functioning.

The workshop came up with several solutions in order to improve the functioning of State Finance Commissions. Some of the recommendations were that experts in public finance should be appointed as its full time chairman & members with the number not exceeding five with serving officers avoided except as secretary. State government should ensure the constitution of SFC with right people at right intervals with strict time schedule. Timely submission of reports with the reports being submitted before the commencement of the award period and the report of the current period being made available to central finance commission. Prompt action should be taken on recommendations and timely tabling of ATR. The workshop also emphasized on setting up of a national forum by the Central government. (Kindly refer to the attached annexure)

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About Participatory Research in Asia (PRIA)

Participatory Research in Asia (PRIA) is an International Centre for Learning and Promotion of Democratic Governance. Founded in 1982, in response to the realization that grass root realities across much of India revealed that governments were unable to deliver relevant or sustainable development programmes. Local level initiatives were successful in raising awareness and mobilizing community to participate in different aspects of their own development. PRIA works locally, nationally and globally.