State Finance Commission

The Governor of a state shall, after every five years, constitute a finance commission. Articles 243-I and 243-Y deal with the formation of this body. The composition, qualifications of members, and the manner of their selection is decided by the concerned state legislature.

Functions:

• The distribution of the net proceeds of taxes, tolls, and fees between the state and local bodies.
• The determination of such taxes, duties, and tolls to be assigned to local bodies.
• The grants-in-aid to be given to the local bodies from the consolidated fund of the state.
• Measures to be taken for improving the financial position of local bodies.
• Any other matter referred to the commission by the governor of the state.

Devolution of Powers and Finances: Issues and Challenges

Schemes of Devolution between Various Levels of Government in India

In India, the devolution of powers and finances to local levels involves transferring decision-making authority and financial resources from the central government to state and local governments. This devolution is guided by constitutional provisions, statutory laws, fiscal policies, administrative measures, and constitutional amendments.

Constitutional Framework:

1. Seventh Schedule of the Constitution:
   • Union List: Central government’s exclusive powers.
   • State List: State government’s exclusive powers.
   • Concurrent List: Shared powers between central and state governments.
2. Parts of the Constitution:
   • Part V and VI: Division of executive powers between the Union and State governments.
   • Part VIII: Executive powers and functions for union territories.
   • Part IX and IXA: 73rd and 74th Constitutional Amendment Acts of 1992, creating panchayats and municipalities for local governance.

Means of Devolution in India

Devolution occurs through various mechanisms:

1. Constitutional Provisions:

• Article 40: Mandates the organization of village panchayats with necessary powers.
• Article 243-243O: Establishes gram sabha, state finance commission, and other local governance elements.
• Article 243P-243ZG: Details urban governance structures.
• Article 280: Empowers Parliament to create a Finance Commission for resource distribution.
• Article 282: Allows central government grants to state and local governments.
• Article 371: Special provisions for certain states.
• Schedules 5 and 6: Administration of Scheduled Areas and Tribal Areas.

Statutory Laws:

• PESA Act 1996: Decentralizes power to tribal communities.
• Forest Rights Act 2006: Ensures tribal participation in decision-making.

Fiscal Decentralization:

• Union Finance Commission: Recommends resource distribution between central and state governments.
• State Finance Commission: Recommends grants to local levels for various functions.

Administrative Decentralization:

• Transfer of decision-making authority from central to state and local governments.

1. Constitutional Amendments:

• 73rd and 74th Amendments: Mandate the formation of Panchayats and Municipalities with constitutional status.

Challenges in Devolution of Powers and Finances in India

1. Goods and Services Tax (GST):
   • States lost autonomy to set tax rates, increasing reliance on the central government for funding.
2. Centrally Sponsored Schemes:
   • States must contribute to these schemes, which may divert resources from state-specific priorities.
3. Limited Capacity of Sub-National Governments:
   • Lack of technical expertise, financial resources, and administrative capabilities.
4. Finance Commission Issues:
   • Southern states argue that using 2011 data penalizes them for population control efforts.
5. Cess and Surcharges:
   • Use of non-divisive cess and surcharges hinders devolution as recommended by the Fourteenth Finance Commission.
6. Lack of Training and Capacity Building:
   • Insufficient training for local officials, leading to ineffective use of devolved powers.
7. Lack of Accountability and Transparency:
   • Risk of corruption and misuse of devolved funds.
8. Inadequate Financial Resources:
   • Local governments often lack sufficient funds to fulfill their responsibilities.
9. Unequal Distribution of Resources:
   • Disparities in resource allocation lead to unequal development.
10. Conflicts Between Local Governments:
    • Disputes over resource control, such as water, can arise.

Assessment of Devolution to Local Bodies in India

Positive Outcomes:

• Strengthened Local Governance: Empowerment of citizens in decision-making and service delivery.
• Improved Public Services: Enhanced provision of drinking water, sanitation, housing, and implementation of development programs like NREGA.
• Greater Accountability: Local bodies are more accountable to citizens.
• Responsive Governance: Better alignment with local needs and aspirations.

Negative Outcomes:

• Capacity Issues: Local bodies often lack technical expertise and financial resources.
• Accountability Challenges: Instances of corruption and mismanagement.
• Slow Devolution of Functionaries: Many local bodies lack necessary personnel.
• Political Resistance: State governments may resist devolving power.
• Overlapping Responsibilities: Inefficiencies due to lack of coordination among government tiers.