Published: Jan 17, 2026

India’s cities and towns face chronic financial instability and weakened planning capacity because of the poor institutionalisation of State Finance Commissions (SFCs), according to a new report released by the Janaagraha Centre for Citizenship and Democracy. The report warns that unless SFCs are strengthened uniformly across states, urban local bodies will continue to struggle with unpredictable funding, constrained service delivery, and limited ability to invest in long-term infrastructure.

Titled Strengthening State Finance Commissions for Empowered Local Governments, the report was released on Saturday and presents one of the most detailed assessments in recent years of how India’s third tier of government is financed. Its central argument is that SFCs—constitutionally mandated bodies meant to recommend how states should share revenues with local governments—remain neglected, weak, and unevenly empowered, despite being the most reliable source of funding for cities.

The central role of SFCs in city finances

The report highlights a striking but often overlooked fact: grants recommended by State Finance Commissions are nearly four times higher than those flowing to urban local bodies from the Union Finance Commission (UFC). This makes SFCs the single most important source of predictable intergovernmental transfers for municipalities.

Indian cities, the report notes, remain structurally dependent on such transfers because their own-source revenues—such as property tax, user charges, and fees—are insufficient. On average, these revenues cover only about 60–70% of a city’s recurrent expenditure. This means that while municipalities may be able to fund some day-to-day operations, they depend heavily on transfers for capital investments like roads, drainage, water supply, and sometimes even for routine operational costs.

“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 said. Unlike centrally sponsored schemes, which come with tight guidelines and timelines, SFC grants allow cities some discretion in addressing local priorities.

Evidence from states: dependence runs deep

Using state-level data, the report illustrates how critical SFC transfers are to the survival of municipal administrations. Karnataka, often cited as a relatively progressive state in urban governance, provides a telling example. In smaller municipalities there, SFC grants account for more than 75% of total receipts. Even in larger cities, they contribute between 40% and 50% of municipal revenues.

In several states, the report found, SFC transfers are not just funding infrastructure projects but are also used to pay staff salaries, electricity bills, and other routine expenses. This underscores how deeply local governments rely on these transfers to function at all.

Institutional weaknesses undermine effectiveness

Despite their importance, SFCs remain institutionally fragile across much of the country. The report identifies multiple structural weaknesses that undermine their ability to function effectively.

One major problem is delay. In several states, there are long gaps between the end of one SFC’s award period and the constitution of the next commission. These gaps range from a month to as long as three years. During such periods, there is often no updated framework guiding how funds should be devolved to local governments, leaving cities in limbo and forcing them to rely on ad hoc arrangements.

Short tenures are another concern. Some SFCs have been appointed for terms as brief as six months, far too little time to conduct detailed financial assessments of state and local government finances. In many cases, these short tenures require repeated extensions, which further disrupt continuity and planning.

The report also points to limited staffing, inadequate technical capacity, and poor access to reliable data as persistent challenges. Without robust data systems and skilled personnel, SFCs struggle to make evidence-based recommendations on revenue sharing and expenditure needs.

Uneven practices across states

State-level practices around SFCs vary sharply, adding to the overall instability of municipal finance. In states such as Uttar Pradesh and Goa, long gaps between successive commissions have been compounded by a lack of transparency. The report notes that there are often no publicly available government orders explaining how devolution to local bodies is handled during interim years, creating uncertainty for municipalities that depend on predictable cash flows.

In contrast, states like Tamil Nadu and Kerala stand out as positive examples. These states have invested in preserving institutional memory by setting up dedicated SFC cells or deputing finance department staff to support the commissions. Such measures ensure continuity, better data management, and smoother transitions between successive commissions, demonstrating that stronger institutional support is both possible and effective.

Accountability gaps and ignored recommendations

The report also highlights serious accountability deficits in how state governments respond to SFC recommendations. Of the 25 SFCs across 17 states examined in the study, 14 had Action Taken Reports tabled more than 12 months late in their respective state legislatures. In some cases, these reports were never tabled at all, weakening legislative oversight and public accountability.

An analysis of 1,138 recommendations made by SFCs across nine states revealed that only 68% were accepted in full. The remaining recommendations were either modified or rejected, often without clear or adequate justification. This selective acceptance, the report argues, undermines the credibility of SFCs and discourages rigorous analysis and long-term planning.

Recommendations for reform

To address these systemic issues, the Janaagraha report calls for elevating State Finance Commissions to the same institutional standing as the Union Finance Commission. It argues that if local governments are to function as a meaningful third tier of governance, SFCs must be treated as permanent, professional, and independent bodies rather than ad hoc committees.

Key recommendations include fixing strict timelines for the constitution of SFCs to prevent gaps between commissions, ensuring adequate staffing and technical capacity, and strengthening data systems to support evidence-based decision-making.

The report also recommends that state governments be mandated to present Action Taken Reports in their legislative assemblies within six months of receiving SFC recommendations. These reports should clearly explain why specific recommendations were accepted, modified, or rejected.

To improve planning and budgeting, the report suggests that states constitute SFCs at least two years before the start of the next award period and ensure that their reports are submitted before budget preparation begins. This would allow recommendations to be meaningfully integrated into state and municipal budgets, rather than being treated as an afterthought.

Why it matters for citizens

The implications of weak SFCs go beyond accounting and intergovernmental finance. Poorly funded and uncertain municipal finances translate directly into gaps in urban services—unreliable water supply, inadequate sanitation, poor road maintenance, and limited investment in climate resilience and public transport.

Prabhat Kumar, director of public finance management at Janaagraha and one of the authors of the report, said strong local governments are essential for improving citizens’ quality of life. “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,” he said.

“Strengthening their functioning through continuity, capacity, and accountability is essential to ensure that resources reach local governments where they matter most,” Kumar added.

A timely discussion

The report was released in Pune at a conference attended by chairpersons of State Finance Commissions from Tamil Nadu, Haryana, Kerala, Telangana, and Maharashtra, along with senior officials from the Ministry of Housing and Urban Affairs and the Ministry of Panchayati Raj. The gathering underscored a growing recognition that India’s urban future depends not just on flagship schemes, but on the quiet, structural work of fixing how cities are funded.

As India urbanises rapidly, the report argues, the cost of ignoring SFC reform will only grow—leaving cities financially fragile and citizens paying the price thro