After Finance Commission nudge, all states but Arunachal form panels, Gujarat latest

• After being nudged by the Fifteenth Finance Commission, all states, except Arunachal Pradesh, have State Finance Commissions (SFCs) in place, the latest being Gujarat, which formed its commission.

Highlights:

• All states except Arunachal Pradesh have constituted State Finance Commissions (SFCs), with Gujarat forming its commission on November 4, 2024.
• This development follows a push by the Fifteenth Finance Commission (15th FC) to ensure compliance with constitutional provisions.

Constitutional Mandate for SFCs

Article 243-I of the Constitution:

• Requires states to constitute an SFC within one year of the commencement of the 73rd Amendment (1992) and thereafter every five years.
• SFCs are tasked with reviewing the financial position of panchayats and recommending principles for the distribution of state revenues between the state and panchayats.

Purpose of SFCs:

• Ensure equitable financial devolution to local self-governments.
• Align state transfers with the needs of panchayats and urban local bodies.
• Issues Highlighted by the 15th Finance Commission

Delays in Constituting SFCs:

• As of 2020, only 15 states had set up their 5th or 6th SFCs, while some were still functioning under the 2nd or 3rd SFCs.
• The 6th SFC was due in 2019-20, but only nine states had constituted it.

Ineffective Implementation:

• SFC recommendations were often delayed or ignored.
• Many states failed to provide an explanatory memorandum on the action taken on SFC recommendations.

Lack of Current Mandate:

• The intended five-year mandate of SFCs was not adhered to, reducing their relevance in guiding state transfers.

Impact on Fiscal Devolution:

• Finance Commissions lacked access to updated recommendations from SFCs, undermining the strength of local financial governance.

Recommendations by the 15th Finance Commission

• Strict Compliance by March 2024:
  • States failing to comply with constitutional provisions regarding SFCs would face a cessation of grants post-March 2024.
• Certification by Ministry of Panchayati Raj:
  • The Ministry of Panchayati Raj was tasked with certifying compliance before releasing state grants for 2024-25 and 2025-26.
• Timely Constitution and Action:
  • All states must constitute their SFCs promptly, act on their recommendations, and present explanatory memoranda to state legislatures.

Prelims Takeaways

• Article 243-I
• State Finance Commissions