[Editorial Analysis] Strengthening the federal link

Mains Paper: 2 | Governance

Prelims level: State Finance Commission

Mains level: There must be recognition of the potential of State Finance Commissions in building regional equity.



• The State Finance Commission (SFC) is a unique institution created by the 73rd and 74th Constitutional Amendments (CAs)

• It has to rationalise and systematise State/sub-State-level fiscal relations in India.

• It has few parallels in other federal systems. Its primary task is to rectify growing horizontal imbalances in the delivery of essential public services to citizens.

• But there has been inadequate appreciation of the significance of this institution by the Union, States as well as the professional community.

Historical Context

• Article 243I of the Constitution mandated the State Governor to constitute a Finance Commission within one year of the CAs (before April 24, 1994) and thereafter every five years.

• This means fifth generation SFCs ought to have submitted reports by now, with around 140 reports available in the public domain.

• Till date, only Assam, Himachal Pradesh, Tamil Nadu and Kerala have submitted their fifth SFC reports.

• Many States are yet to cross the third SFC stage.

• The large majority has violated the mandate of the Constitution with impunity.

• Is honouring the Constitution a matter of convenience?

• The seriousness, regularity, acceptance of recommendations and their implementation which characterise the Union Finance Commissions (UFCs) are conspicuously absent when it comes to SFCs.

• The UFC has been widely acknowledged as a professional and quasi-judicial body when compared to the SFC.

Comparison between UFCs and SFCs

• For historical reasons, UFCs, particularly from the third, have chosen a restrictive role of staying away from plan and investment allocations.

• SFCs normally could not do this although some have chosen the UFC path.

• Now that the Planning Commission has been dismantled, the 15th UFC has to spell out its decision-making domain.

• It is important to disabuse the notion among several politicians, policy makers and even experts that SFCs.

• The local governments they deal with have an inferior constitutional status when compared to the UFC.

• The SFC is undoubtedly modelled on the UFC created under Article 280 and exemplified in Articles 243I and 243Y.

• While the UFC is tasked with rectifying vertical and horizontal imbalances at the Union-State level.

• The SFC has to perform the same with reference to State/sub-State-level institutions.

• The Constitution treats a local government on a par with a State government, especially when it comes to sharing of financial resources.

What are the link roles?

• The SFC to correct horizontal imbalances is extremely onerous when compared with the UFC as SFCs have to consider nearly 2.5 lakh local governments to promote minimum essential services in rural and urban areas.

• SFC is the institutional agency to implement the golden rule of cooperative federalism that every citizen should be assured minimum public goods irrespective of her choice of residence.

• Four, Article 280(3) has been amended to add clauses (bb) and (c) in order to take measures to augment the resources of panchayats and municipalities on the basis of the recommendations “made by the finance commission of the state”.

• These sub-clauses affirm the organic link between local governments and SFCs to fiscal federalism.

• It is only when inter-State disparities are reduced by the UFCs through their inter-se distribution criteria and intra-State disparities are reduced by SFCs through the horizontal distribution criteria,

• That the Indian federation becomes a sustainable and inclusive nation-state.

Other reasons

• UFCs had no data problem in reviewing the finances of the Union and States.

• The financial reporting system of the Union and States is well laid down.

• On the other hand, local governments with no proper budgetary system are in deep disarray and, because of that, SFCs face a crucial problem of reliable data.

• In short, several sufficient conditions remain unfulfilled in the case of SFCs.

• The federalist development state of India can grow only through a process of evolutionary policy making which works towards cherished goals.

• The CAs left the task of adequately empowering local governments to discharge constitutional obligations to the States.


• UFCs have failed to play a hand-holding role in placing decentralised governance properly in the cooperative federal map of India.

• The hard truth is that no UFC has done its homework in reading and analysing SFC reports.

• Without presenting a consolidated account of the reality at the sub-State level or highlighting which report went wrong.

• No UFC can legitimately guide States or contribute to improving the goals of constitutional amendments.

• Their well-designed grant scheme to incentivise States was not given a fair trial.

• In sum, SFCs have not been provided with the necessary environment to play their rightful role in Indian fiscal federalism.

• A great opportunity to build regional equity in India has been undermined.

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