The 73rd and 74th Amendments to the Constitution have provided constitutional status to Panchayats, Municipalities to function as local self-government institutions. The Constitution also provides for States to devolve, through legislation, functions to these institutions as illustrated in the Eleventh and Twelfth Schedules of the Constitution for rural and urban local bodies, respectively. While the States have generally assigned most of these functions to PRIs, the corresponding devolution of funds and functionaries remains a critical issue. The own source revenues of the local bodies being very small, they largely depend on the devolution of funds from the Central and the State Governments and Finance Commissions.
There is an urgent need to vest the Panchayats, with adequate tax and non-tax powers and at the same time ensure that the fiscal powers given are effectively exercised since generating own revenue is the best way to increase autonomy, credibility and accountability of the Panchayats. Fiscal decentralisation therefore, needs to be viewed as a comprehensive system of strengthening the financial resource base of the Panchayats so that the assignment of expenditure functions is matched with devolution of funds.
To address this issue, the Constitution provides for setting up of a State Finance Commission every five years to review the financial position of the Panchayats (and also urban local bodies) and recommend criteria for distribution of financial resources between the State and the Panchayats as also other measures to improve the financial base of the Panchayats. Thus, the State Finance Commissions, SFCs, have vital role to play in the scheme of decentralization, while arbitrating on the claims to the resources by the local governments and the State Governments and ensuring greater stability and predictability to the transfer mechanism.
Also there has been growing concern about the smooth functioning and capacity of the SFCs. Several SFCs themselves are not adequately staffed and lack the required infrastructure and resources. The database on various aspects of Panchayats’ functioning is inadequate for the SFCs to take informed decisions and make recommendations accordingly. The States have the basic responsibility of enhancing the credibility of the SFCs. The SFCs, therefore, need to be strengthened and their work and reporting streamlined in many ways including some standardization in their method and approaches.
Fourteenth Finance Commission (FFC) in their report which was submitted in December, 2014 have inter alia made the following observations on the role of State Finance Commissions – “there is wide variation in the assignment of functions, funds and functionaries across States, it is not feasible for the Finance Commission to carry out a detailed assessment of the finances of local bodies in each State nor has such a role been assigned to it under the TOR or the Constitution. The Constitution envisages that the needs of local bodies within the State shall be assessed in detail by the SFC, which will recommend the required transfer of resources from the State to them. Therefore, it is appropriate that the needs of local governments are assessed in detail by the SFC. The FFC has further observed that despite the passage of time, SFCs in many States continue to work with a lot of disadvantages. The FFC has recommended that the States should facilitate effective working of SFCs, through timely constitution, proper administrative support and adequate resources and timely placement of the SFC reports before State legislatures, with action taken notes and timelines for completing actions.