Financial devolution in a multilevel system: An evaluation of the working of state finance commissions in India

The significance of the efforts by local governments in achieving Sustainable Development Goals (SDGs) is paramount. However, local governments in India face several obstacles in achieving the SDGs, bottlenecks in the free flow of funds being one of them. The 73rd and 74th Constitutional Amendments, which constitutionalized rural and urban local governments in 1993, also mandated the periodic constitution of the State Finance Commission (SFC) as a constitutional body in India. The design of the SFCs aimed to replicate the Union Finance Commission (UFC) at the provincial level, promoting democratic decentralization from states to local bodies. These amendments introduced Articles 243I and 243Y, which mandated periodic institutions of SFCs to supervise the transfer of funds to local governments. By now, all states should have progressed to their seventh-generation SFCs. Several challenges, such as delay in the constitution of SFCs, non-synchronization of SFCs with UFC period, and delay in the submission of reports, have impeded the functioning of the SFCs as well as the UFCs. The 15th UFC has recommended using the SFC reports as a precondition for releasing grants to local bodies after March 2024. Even though the 16th UFC has already been constituted, only nine states have managed to submit the report of their 6th SFCs. Against this backdrop, this paper delves into the institution of SFCs in India, exploring their significance, analyzing the challenges they face, and proposing potential solutions.