Weak state finance commissions leave city finances unstable: Janaagraha report

NEw new delhi: weakness to institutionalise and uniformly authorize say Finance Commissions (SFCs) crosswise Indian states would leave municipal finances unstable and city planning weakened, a report by Janaagraha Centre for Citizenship and Democracy released on Saturday said.“Despite being the most predictable source of funding for India’s cities and towns, SFCs remain neglected and unevenly empowered across states,” the report, titled Strengthening State Finance Commissions for Empowered Local Governments, said.The report highlighted that SFC grants are nearly four times higher than Union Finance Commission (UFC) grants to urban local bodies, and that cities, in the absence of strong own-source revenues, are largely dependent on them.It said that own-source revenues typically covered only 60–70% of recurrent expenditure, leaving capital investment and some operational spending reliant on intergovernmental transfers.“Since scheme-based funding from state and central governments is often sector-linked and time-bound, SFC devolution remained the only flexible and predictable funding stream available to many municipalities,” the report added.In Karnataka, one of the more progressive states, State Finance Commission (SFC) grants accounted for over 75% of total receipts in smaller municipalities and 40–50% in larger cities. In many states, SFC transfers were the only predictable source of funds not only for infrastructure creation but also for paying municipal staff salaries and routine operating expenses, underscoring their central role in keeping city administrations running.Despite their importance, the report found that SFCs remained institutionally weak. Delayed formation, short tenures, limited staffing and poor access to data continued to undermine their effectiveness.In several states, gaps between the end of one commission’s award period and the constitution of the next stretched from one month to as long as three years, leaving local governments without updated frameworks for fund sharing. Some SFCs were appointed for terms as short as six months, forcing repeated extensions and limiting their ability to carry out thorough financial assessments.State practices around SFCs also varied sharply. In states such as Uttar Pradesh and Goa, long gaps between successive commissions left no publicly available government orders clarifying how devolution was handled during interim years, creating uncertainty for city finances.By contrast, Tamil Nadu and Kerala were cited among the few states that invested in preserving institutional memory for SFCs through dedicated cells or deputed finance department staff, showing that stronger institutional support was possible.Accountability gaps further weakened the system. In 14 of 25 SFCs across 17 states, Action Taken Reports by state governments were tabled more than 12 months late, and in some cases were never tabled. Of the 1,138 recommendations analysed in the report across nine states, only 68% were accepted as is, while the rest were modified or rejected, often without adequate justification.As a remedy, the report called for giving SFCs the same standing as the Union Finance Commission (UFC). Key recommendations included fixing timelines for constituting SFCs, ensuring adequate staffing and data systems, and requiring state governments to present Action Taken Reports in their assemblies within six months, with clear explanations for accepted or rejected proposals.The report also recommended that states constitute SFCs at least two years before the start of the next award period and submit reports before budget preparation begins to prevent delays in city funding decisions.Prabhat Kumar, director of public finance management at Janaagraha and one of the authors of the report, said, “Well-functioning cities and villages—and better liveability and opportunity for citizens—depend on stronger local governments. If the third tier of government is to work as intended, SFCs must command the same institutional credibility as the Union Finance Commission. Strengthening their functioning through continuity, capacity, and accountability is essential to ensure that resources reach local governments where they matter most.”The report was released in Pune as part of a conference attended by chairpersons of SFCs from Tamil Nadu, Haryana, Kerala, Telangana and Maharashtra, as well as senior officials from the Ministry of Housing and Urban Affairs (MoHUA) and the Ministry of Panchayati Raj (MoPR).