Despite key role in funding local bodies, state finance panels remain weak: Study

NEW DELHI: Only seven states — Rajasthan, Haryana, Tamil Nadu, Bihar, Kerala, Assam and Himachal Pradesh — have constituted all seven State Finance Commissions (SFCs) since 1992–93, when Parliament passed two constitutional amendment Acts to institutionalise local govts in urban and rural areas, according to a report published by Janaagraha, a think tank on local governance.

This highlights how most state govts have failed to prioritise the institutionalisation of SFCs, which play a crucial role in devolution of finances to municipal and other local bodies. The study on SFCs flagged chronic delays in constituting these commissions, weakening them from inception. In many cases, SFCs were constituted with truncated tenures — sometimes as short as six months — and continued functioning through repeated extensions.

In contrast, the Finance Commission (FC) set up by Centre has a fixed two-year term. The report noted that despite being the most predictable source of funding for cities and towns, SFCs remain neglected and unevenly empowered across states.

It called for giving SFCs the same standing as FC. Its recommendations include fixing timelines for constituting SFCs, ensuring adequate staffing and data systems, and requiring state govts to present Action Taken Reports in their assemblies within six months, with clear explanations for accepted or rejected proposals.

The report highlighted that transfers from state govts to local bodies, as recommended by SFCs, are, on average, nearly four times larger than those by FC, making SFCs vital to local govts. This is particularly significant given that most urban local bodies have weak own-source revenues.

According to the report, own-source revenues of municipal bodies cover only 60–70% of their recurrent expenditure. They largely depend on state and central grants for capital investment and some operational spending. It also noted that 72% of urban infrastructure is financed by central and state govts.

“Scheme funding is typically sector-linked, and its continuity cannot always be guaranteed. In comparison, devolutions recommended by FC and SFCs are meant to provide predictable, flexible and autonomous funding to meet local needs,” the report said. It added that in many states, SFC grants are the only predictable source of funds for municipal bodies — not just for asset creation but also for payment of staff salaries and operational and maintenance expenses.

For instance, in Karnataka, SFC grants accounted for over 75% of total receipts in smaller municipalities and 40–50% in larger cities.