State Finance Commission(SFCs) and Challenges to it

State Finance Commission(SFCs) and Challenges to it

HOT ISSUES FOR MAINS-2019(TOPIC #7)(SecureIas Initiative)


  • State Finance Commission (SFC) is created by the 73rd and 74th Constitutional Amendments (CAs) to enhance State/sub-State-level fiscal relations in India
  • Article 243I of the Constitution mandated the State Governor to constitute a Finance Commission every five years.This mandate is continuously breached by states with as low as 2 SFCs in last 25 years
  • Differences and challenges over UFC
  • After scrapping of PC, UFC may have role in plan and investments which is totally absent with SFCs
  • Notion of inferior constitutional status to SFCs when compared to UGC
  • Task of SFCs to consider 2.5 lakh local govts to promote minimum essential services in rural and urban areas while UGC deals with only 28 states and 7 UTs
  • SFC face paucity of data about numerous local bodies while data about the states is readily available with UFC
  • SFC is the body which works at groundroot levels for economic development and social justice
  • UFCs and SFCs both are constitutionally mandated bodies working at tandem where inter-State disparities are reduced by the UFCs through their vertical/Inter-se distribution criteria and intra-State disparities are reduced by SFCs through the horizontal distribution criteria and hence making Indian federation more inclusive and sustainable.

Problems being faced by SFCs

  • For historical reasons, UFCs, particularly from the third, have chosen a restrictive role of staying away from plan and investment allocations
  1. SFCs normally could not do this although some have chosen the UFC path
  2. 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, policymakers and even experts that SFCs and the local governments they deal with have an inferior constitutional status when compared to the UFC
  1. The SFC is undoubtedly modelled on the UFC created under Article 280 and exemplified in Articles 243I and 243Y
  2. 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
  3. The Constitution treats a local government on a par with a State government, especially when it comes to sharing of financial resources
  • SFCs face a crucial problem of reliable data
  1. The financial reporting system of the Union and States is well laid down
  2. On the other hand, local governments with no proper budgetary system are in deep disarray

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