Strengthening India's State Finance Commissions: Essential for 'Co-Operative Federalism'

Abstract

The 73rd and 74th Amendments in 1992 to India’s Constitution resulted in the establishment of the third-tier of government comprising of urban local bodies (ULBs) and Panchayati Raj Institutions (PRIs). The amendments mandated the establishment of the State Finance Commissions (SFCs) at every five years to recommend allocation and devolution of States’ fiscal resources between, and among, ULB and PRIs, with the view to improving accessibility of public amenities and services. This paper has developed a framework for assessing the role of SFCs in India over the last two decades. The framework focuses on the criteria involving processes and outputs of the SFCs. The analysis strongly suggests that SFCs have, so far, had an extremely limited impact on improving fiscal arrangements within states, enhancing the accountability of State governments, as well as that of ULBs and PRIs, in addressing vertical and horizontal fiscal imbalances, and in increasing access to public amenities. The evolving dynamics of Union - State relations in India implies there is an urgent need to address challenges of rapid urbanization, the changing nature of PRIs, rising aspirations of people across the country - particularly in terms of good quality public amenities. These strongly SFCs need to undergo a transformative change. The work of forthcoming SFCs and responses of State governments to their recommendations require much greater attention by all the stakeholders, including the researchers. The challenge after more than two decades is to enhance the role which the third tier of government plays in India in improving accessibility, quality and affordability of public amenities to citizens, and making them more accountable.