India's City Finances Hang in the Balance: Janaagraha Report Highlights SFC Weaknesses

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A new report by Janaagraha Centre for Citizenship and Democracy has sounded an alarm for India's city finances, citing the weakness of State Finance Commissions (SFCs) as a major concern. Despite being the most reliable source of funding for cities, SFCs are often neglected and unevenly empowered across states, leaving municipal finances unstable and city planning weakened. According to the report, titled 'Strengthening State Finance Commissions for Empowered Local Governments,' SFC grants are nearly four times higher than Union Finance Commission (UFC) grants to urban local bodies. Cities rely heavily on these grants, which cover up to 60-70% of recurrent expenditure. However, the effectiveness of SFCs is undermined by institutional weaknesses, including delayed formation, short tenures, limited staffing, and poor access to data. In some states, gaps between SFCs have stretched for up to three years, leaving local governments without updated frameworks for fund sharing. State practices around SFCs also vary sharply, with some states investing in preserving institutional memory while others leave city finances uncertain. The report highlights accountability gaps as a major concern, with 14 out of 25 SFCs across 17 states failing to table Action Taken Reports on time. Only 68% of the report's recommendations were accepted, with the rest modified or rejected without adequate justification. To address these concerns, the report recommends giving SFCs the same standing as the Union Finance Commission (UFC) and implementing key reforms, including fixing timelines for constituting SFCs, ensuring adequate staffing and data systems, and requiring state governments to present Action Taken Reports within six months. The report's authors emphasize the importance of strengthening SFCs to ensure that resources reach local governments where they matter most. 'Well-functioning cities and villages—and better liveability and opportunity for citizens—depend on stronger local governments,' said Prabhat Kumar, director of public finance management at Janaagraha. 'Strengthening the functioning of SFCs is essential to ensure that city finances are stable and city planning is effective.' The report was released in Pune as part of a conference attended by chairpersons of SFCs from several states, as well as senior officials from the Ministry of Housing and Urban Affairs (MoHUA) and the Ministry of Panchayati Raj (MoPR).