Skip to content
Related Articles

Related Articles

State Finance Commission

View Discussion
Improve Article
Save Article
  • Last Updated : 05 Aug, 2022
View Discussion
Improve Article
Save Article

The State Finance Commission (SFC) is a Constitutional body, formed under the 73rd and 74th Constitutional Amendment Act, 1992. It recommends the transfer of funds from the State Government to the Panchayati Raj Institutions and provides suggestions for augmenting their resources. Municipalities and city councils are also brought under the purview of the State Finance Commission as per Article 243-Y.

Who Appoints the State Finance Commission?

  • The Governor of a State appoints a Finance Commission, every five years in accordance with Article 243-I of the Indian Constitution. 
  • Every recommendation of the State Finance Commission and subsequent action taken by the State Government must be brought before the State legislature by the Governor.

Functions of the State Finance Commission:

State Finance Commission’s functions are comparable to that of the Central Finance Commission, which, in accordance with Article 280 of the Indian Constitution, is appointed by the President of India and is in charge of allocating central revenues to the Union and state governments. The functions of the State Finance Commission are:

  • A State Finance Commission examines the financial position of the panchayats and municipal organizations in a state and offers recommendations to the Governor.
  • It gives suggestions to the Governor regarding the policies that should control how taxes, tariffs, levies, and toll fees collected by the state are divided between the state and its Panchayati Raj Institutions at all levels.
  • To implement numerous measures to enhance the financial conditions of various local authorities and Panchayati Raj Institutions.
  • To serve as a liaison for financial matters between the Union and State governments for local bodies.
  • The Grant-in-Aid to Local Bodies from the consolidated fund of the state.
  • Utilising the funds that the state government receives from the Union government.
  • Disbursement of funds from the State’s consolidated fund to various municipal organizations and Panchayati Raj Institutions of the state.
  • Measures for the overall advancement of Panchayat’s finances.

Limitations of the State Finance Commission:

State Finance Commission is a very important institution for the decentralized democracy of India, despite that, it is facing a number of limitations. These are:

  • A significant concern is the composition of the State Finance Commission. It is mainly dominated by the presence of bureaucrats and not academicians and experts.
  • The SFCs face a crucial problem of reliable data. Since local governments lack a proper budgetary system so they face problems while collecting data and, as a result, evaluating the local government’s financial situation.
  • Many states have seen a discrepancy between the State Government’s actual money transfers to the local bodies as suggested by State Finance Commission. For example, Manipur has seen such a discrepancy. 
  • Local governments and SFCs are thought to have a lower Constitutional status than the Union Finance Commission. The empowerment and finances of local bodies have been impacted by these changes.
  • The XIth and XIIth Finance Commissions have lamented the fact that the majority of State Finance Commissions are not doing their duties to a high standard.

Measures Need to be Taken for State Finance Commission:

To strengthen the State Finance Commission, various measures need to be taken. The 6th report of the 2nd ARC also states some steps. These are 

  • The states should periodically constitute State Finance Commission, in line with Constitutional requirements.
  • To support cooperative federalism and deepen participatory democracy, the SFCs must be strengthened urgently.
  • Implementation of recommendations of SFCs by the state government must be ensured. 
  • State Finance Commissions should not just be composed of bureaucrats, but also include members of intellectual civil society and professors.
  • It is crucial to acknowledge the functions of SFCs and it should not be seen as inferior when compared to the Central Finance Commission. 
  • The majority of states should recognize the significance of this institution in terms of its ability to further the democratic decentralization process.


The enlarged role of the State Finance Commission can change dramatically the nature and character of Fiscal Federalism. In addition to financial issues, local bodies also face institutional, structural, administrative, and political issues, the majority of which must be resolved by the State Government. Local bodies are the pillar of India and to see India as an empowered nation, institutions like State Finance Commission must be strengthened.


My Personal Notes arrow_drop_up
Recommended Articles
Page :

Start Your Coding Journey Now!