Centre for Distance and

Online Education KUK

Programme Name
B.A-1(Sem-II)
(Rural Local Governance)

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Dr. Jyoti, Assistant Professor
Public Administration
Centre for Distance and
Online Education
Kurukshetra University, Kurukshetra
Haryana (India)

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 Content
 Introduction of State Finance Commission
 Origin and Significance
 Composition of SFC
 Qualification of Chairman/Member
 Disqualification
 Power and Function of SFC
 Major Problems
 Conclusion

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 INTRODUCTION
 In a federal setup, along with the balancing of functions and
powers, there is a crucial issue of distribution of financial
resources between the Union and other units of government. As
the local bodies have meager resources of their own, therefore
they have to depend on devolution of funds from the central and
state governments.
 It has been observed that they rely more on fiscal transfers from
the state government in the form of shared taxes and grants.
These taxes are, generally, shared on the basis of
recommendations of the State Finance Commission (SFC) of the
state.

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In addition to the tax sharing, the SFC is assigned the task
of reviewing the financial position of local bodies; and
recommending the assignment of various taxes, duties, fees,
and grants inaid to be given to local bodies from the
Consolidated Fund of the states. The constitution of SFC at a
regular interval of five years is mandatory requirement for
all states in India. As a SFC has functions similar to that of
the Central Finance Commission, therefore for better
understanding we will briefly discuss the origin and functions
of the Finance Commission in the following Section.

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 Origin and Significance
 Localbodies, rural as well as urban, have been accepted for
having a great role in the social, economic and political
development.
 However, on account of various reasons such as rapid
population growth, urbanization, poverty, and lack of proper
devolution of financial resources, the local governments have
been subjected to heavy financial strains. The Local bodies
heavily depend on the state governments in matter of grants.

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 One of the important suggestions has been to setup a
Finance Commission for every state on the pattern of Central
Finance Commission.
 It was suggested that on the pattern at the national level
there should be a system of appointment of State Finance
Commission, which should recommend a pattern of
distribution of sources of income between the state
government and local bodies.
The passage of 73rd and 74th Constitutional Amendments is
a big milestone development in the history of independent
India.

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 An important aspect of these amendments pertains to the
finances of local bodies. The Amendment Acts provided for
setting up of State Finance Commission in each State.
 In order to meet the constitutional requirements under
Article 243 I and 243 Y inserted by the 73rd and 74th
constitutional Amendments to the Constitution, the states
passed the legislation to setup the State Finance Commission.
Since 1993, the states have been setting up their respective
Finance Commissions for local bodies at the expiry of every
five years.

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 Composition of SFC
 In every state the appointment of State Finance Commission
takes place on the basis of its announcement made by the
Governor; and it comes into existence from the date of assuming
of charge by its Chairman and members.
 As far as composition of the Finance Commission is concerned,
there is no uniformity and not much variation too. It consists of a
Chairman and a few members. In some states their strength is
specified by the state legislation.
 State Finance Commission is appointed for every five years.

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 Qualifications for
Chairman/Members
 Some of the states have clearly specified the
qualifications/conditions for the appointment of Chairman and
members, while in other states there is no such specification.
The person to be appointed as Chairman of the Finance
Commission is required to have an experience in public affairs
and the persons to be appointed as Members thereof are
required to have:-
 Special knowledge and experience in economic and financial
matters regarding Panchayats.

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 Special knowledge and experience in economic and financial
matters regarding Municipalities.
 Wide experience in financial matters, and administration.
 Special knowledge of economics.
 Before appointing a person as a Chairman or Member of the
State Finance Commission, the Governor has to satisfy
herself/himself that the person to be appointed has no
financial or any other interest as is likely to affect prejudicially
her/his functions as Chairman or State Finance
Commission/Member of the Finance Commission.

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 Disqualification
 A person may be disqualified for being appointed as Member
or for being a Member of the Finance Commission, if:
 She/he is of unsound mind.
 She/he is an undercharged insolvent.
 She/he has been convicted of an offence, which involves moral
turpitude
 She/he has such financial or any other interest, as is likely to
affect prejudicially her/ his functions as a Member of the State
Finance Commission.

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Term of Members: Every member of the State Finance
Commission holds office for such period as may be specified
in order of the Governor appointing her/him as such but shall
be eligible for reappointment, provided that s/he may, by a
letter addressed to the Governor, resign her/his office, at any
time prior to the period specified in her/his appointment
letter.
 Conditions of Service: The Chairman and Members of the
Finance Commission may render whole time or part time
service to the State Finance Commission as the Governor may
in each case specify and they shall be paid fees or salaries and
such allowances as the State Government may prescribe from
time to time.

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 Powers of SFC
 The Finance Commission at the state level are being
constituted to review the financial position of the Panchayats
and Municipalities; and make recommendations. In every
state, a notification is issued every time for appointment of the
State Finance Commission and generally carries terms of
reference.
 The measures needed to improve the financial position of
the panchayats and municipalities.
 Any other matter referred to the Finance Commission by the
Governor in the interest of sound financial position of the local
bodies.

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The principles that should govern:

 Thedistribution between the state and local bodies of the net

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 Functions of SFC
 State Finance Commission’s functions are comparable to
that of the Central Finance Commission, which, in
accordance with Article 280 of the Indian Constitution, is
appointed by the President of India and is in charge of
allocating central revenues to the Union and state
governments. The functions of the State Finance
Commission are:
 A State Finance Commission examines the financial
position of the panchayats and municipal organizations
in a state and offers recommendations to the Governor.

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 It gives suggestions to the Governor regarding the policies
that should control how taxes, tariffs, levies, and toll fees
collected by the state are divided between the state and its
Panchayati Raj Institutions at all levels.
 To implement numerous measures to enhance the financial
conditions of various local authorities and Panchayati Raj
Institutions.
 To serve as a liaison for financial matters between the Union
and State governments for local bodies.
 The Grant-in-Aid to Local Bodies from the consolidated fund
of the state.

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 Working of SFC
 The Commissions are required to recommend the principles
that should govern the distribution of financial resources
between state government and local bodies– Panchayati Raj
Institutions as well as the Urban Local State Finance Commission.
These commissions are also required to suggest necessary
measures to improve the financial position of panchayats and
municipalities.
 As far as the functions or a term of reference for the State
Finance Commission is concerned, it has been observed that
there is basic similarity in most of the states. However, some of
the states have been assigning additional duties to their
commissions.
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 Major Problems
 The Commission, in its analysis of finances of in particular
examined the major problems arising from:
• Imbalance between revenue and expenditure
• Imbalance amongst similarly placed classes of the Municipalities

• Dependence of Municipalities on higher levels of the

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 Limitations
 State Finance Commission is a very important institution for
the decentralized democracy of India, despite that, it is facing
a number of limitations. These are:
 A significant concern is the composition of the State Finance
Commission. It is mainly dominated by the presence of
bureaucrats and not academicians and experts.
 The SFCs face a crucial problem of reliable data. Since local
governments lack a proper budgetary system so they face
problems while collecting data and, as a result, evaluating the
local government’s financial situation.

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 Many states have seen a discrepancy between the State
Government’s actual money transfers to the local bodies as
suggested by State Finance Commission.
 Local governments and SFCs are thought to have a lower
Constitutional status than the Union Finance Commission. The
empowerment and finances of local bodies have been impacted
by these changes.
 The XIth and XIIth Finance Commissions have lamented the fact
that the majority of State Finance Commissions are not doing
their duties to a high standard.

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 Need of SFC
 To strengthen the State Finance Commission, various
measures need to be taken. The 6th report of the 2nd ARC
also states some steps. These are
 The states should periodically constitute State Finance
Commission, in line with Constitutional requirements.
 To support cooperative federalism and deepen participatory
democracy, the SFCs must be strengthened urgently.
 Implementation of recommendations of SFCs by the state
government must be ensured.

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 State Finance Commissions should not just be composed
of bureaucrats, but also include members of intellectual
civil society and professors.
 It is crucial to acknowledge the functions of SFCs and it
should not be seen as inferior when compared to the
Central Finance Commission.
 The majority of states should recognize the significance of
this institution in terms of its ability to further the
democratic decentralization process.

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CONCLUSION
 Finance is the fuel for the engine of administrative machinery. It
has been correctly pointed out that governance is quite close to
financial management. This is also quite relevant to local
government. The efficiency of local institutions greatly depends
upon its finances. Although there is a long list of financial
resources to these institutions, these significant institutions
suffer from the malaise of paucity of funds

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Thanks..!!!

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