[Answered] Examine the role of the Finance Commission in enhancing financial devolution to local bodies in India. What challenges have been faced in achieving this goal? (250 words)

Introduction: Contextual Introduction

Body: What is the role of the Finance Commission and the challenges faced in achieving financial devolution?

Conclusion: Way forward

The 16th Finance Commission (FC) has been established under Article 280 of the Indian Constitution, primarily focusing on the devolution of the consolidated fund. The Finance Commission plays a crucial role in strengthening financial devolution, or the transfer of financial resources from the central and state governments to local bodies (panchayats and urban local bodies) in India.

Role of Finance Commission

  • Revenue Sharing: The FC recommends the allocation of a share of central taxes to local bodies, both urban and rural. This helps ensure that local governments have a steady flow of funds to manage their responsibilities effectively.
  • Grants-in-Aid: The FC provides grants-in-aid to augment the resources of local bodies. These grants are meant to supplement the funds available to local governments for specific purposes, such as infrastructure development, maintenance of public services, and implementing developmental programs.
  • Enhancing Financial Autonomy: The FC suggests measures to improve the financial autonomy of local bodies, such as enhancing their revenue-generating capacities through better tax administration, property tax reforms, and user charges for services.
  • Incentives for Good Governance: The FC sometimes introduces incentives for local bodies that show good governance practices, transparency in financial management, and efficient delivery of public services.


  • State government resistance: Some state governments might be reluctant to devolve a larger share of resources, fearing a strain on their finances. This can lead to delays in constituting State Finance Commissions (SFCs) or implementing their recommendations.
  • Limited tax base: Local bodies often struggle with a limited tax base, making it difficult for them to generate sufficient revenue independently. Property tax collection, for instance, remains low in India.
  • Capacity building: Local bodies may lack the administrative and technical expertise to effectively utilize devolved funds. This can lead to inefficiencies and delays in project implementation.
  • Uncertainties with GST: The Goods and Services Tax (GST) has introduced a new dynamic. While it aims to streamline tax collection, concerns remain about the predictability of compensation for revenue losses faced by states, which can indirectly impact local bodies.


Overall, the Finance Commission acts as a crucial bridge in strengthening financial devolution to local bodies. However, overcoming challenges related to state cooperation, local body capacity building, and navigating the evolving GST framework remains essential for achieving this goal.

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