Aspirant Academy

Economy

State Finance Commission and Local Body Finances

State Budget and Fiscal Management

Paper I · Unit 2 Section 8 of 16 0 PYQs 39 min
Topic Preview Subject Inventory

Public Section Preview

State Finance Commission and Local Body Finances

Constitutional Mandate

Article 243-I (for Panchayats) and Article 243-Y (for Municipalities) — inserted by the 73rd and 74th Constitutional Amendments in 1992-93 — mandate constitution of a State Finance Commission (SFC) every five years. The SFC recommends devolution of taxes, grants, and assignments from the state's Consolidated Fund to:

  • Panchayati Raj Institutions (PRIs): 11,000+ Gram Panchayats, 295 Panchayat Samitis, 33 Zila Parishads
  • Urban Local Bodies (ULBs): 201 ULBs (10 Municipal Corporations, 36 Municipal Councils, 155 Municipal Boards)

6th State Finance Commission

The 6th State Finance Commission of Rajasthan was constituted for the period 2020-21 to 2024-25. Key facts:

  • Fund distribution ratio: GP:PS:ZP = 75:20:5
  • ₹621.07 crore transferred in 2024-25, funding 37,394 works
  • Both PRIs and ULBs have severely constrained own-source revenue capacity — property tax, profession tax, and service charges are the main ULB revenue sources

Key recommendations for the 2025-26 period:

  • Increasing the devolution percentage of state's own taxes to PRIs and ULBs (target: 3-4% of state own taxes)
  • Performance-linked grants for ODF status, property tax collection improvement, and audit compliance
  • Linking with 15th Finance Commission's tied grants for health and sanitation

See Topic #34 for detailed analysis of how SFC devolution interacts with rural development planning, MGNREGS implementation, and Gram Sabha decision-making.

Finance Commission Grants to Local Bodies (15th FC)

The 15th Finance Commission made specific tied and untied grants to Rajasthan's local bodies for 2021-26:

  • Rural Local Bodies: Approximately ₹9,300 crore total for 2021-26 (basic + performance grants)
  • Urban Local Bodies: Approximately ₹3,100 crore total for 2021-26
  • Tied grants: Specifically for sanitation and drinking water — aligned with SDG-6 targets

These grants supplement (not replace) SFC devolution and constitute an important funding stream for rural infrastructure. Non-utilisation or delayed utilisation of these grants is a recurring fiscal management challenge.