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After Finance Commission nudge, all states but Arunachal form panels, Gujarat latest

After Finance Commission nudge, all states but Arunachal form panels, Gujarat latest

  • After being nudged by the Fifteenth Finance Commission, all states, except Arunachal Pradesh, have State Finance Commissions (SFCs) in place, the latest being Gujarat, which formed its commission.

Highlights:

  • All states except Arunachal Pradesh have constituted State Finance Commissions (SFCs), with Gujarat forming its commission on November 4, 2024.
  • This development follows a push by the Fifteenth Finance Commission (15th FC) to ensure compliance with constitutional provisions.

Constitutional Mandate for SFCs

Article 243-I of the Constitution:

  • Requires states to constitute an SFC within one year of the commencement of the 73rd Amendment (1992) and thereafter every five years.
  • SFCs are tasked with reviewing the financial position of panchayats and recommending principles for the distribution of state revenues between the state and panchayats.

Purpose of SFCs:

  • Ensure equitable financial devolution to local self-governments.
  • Align state transfers with the needs of panchayats and urban local bodies.
  • Issues Highlighted by the 15th Finance Commission

Delays in Constituting SFCs:

  • As of 2020, only 15 states had set up their 5th or 6th SFCs, while some were still functioning under the 2nd or 3rd SFCs.
  • The 6th SFC was due in 2019-20, but only nine states had constituted it.

Ineffective Implementation:

  • SFC recommendations were often delayed or ignored.
  • Many states failed to provide an explanatory memorandum on the action taken on SFC recommendations.

Lack of Current Mandate:

  • The intended five-year mandate of SFCs was not adhered to, reducing their relevance in guiding state transfers.

Impact on Fiscal Devolution:

  • Finance Commissions lacked access to updated recommendations from SFCs, undermining the strength of local financial governance.

Recommendations by the 15th Finance Commission

  • Strict Compliance by March 2024:
    • States failing to comply with constitutional provisions regarding SFCs would face a cessation of grants post-March 2024.
  • Certification by Ministry of Panchayati Raj:
    • The Ministry of Panchayati Raj was tasked with certifying compliance before releasing state grants for 2024-25 and 2025-26.
  • Timely Constitution and Action:
    • All states must constitute their SFCs promptly, act on their recommendations, and present explanatory memoranda to state legislatures.

Prelims Takeaways

  • Article 243-I
  • State Finance Commissions

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