Article 243-I

Article 243-I of the Constitution of India establishes the constitutional basis for constituting a Finance Commission for Panchayats. This provision, forming part of Part IX of the Constitution, was inserted through the 73rd Constitutional Amendment Act, 1992, with the objective of strengthening democratic decentralisation and ensuring financial empowerment of local self-governing institutions in rural India. The Finance Commission for Panchayats plays a critical role in ensuring fiscal decentralisation and equitable resource distribution between the State and the Panchayati Raj institutions.

Background and Constitutional Context

The 73rd Amendment Act, 1992 introduced a comprehensive framework for local self-government by incorporating Part IX (Articles 243 to 243-O) into the Constitution. This reform was a response to the growing demand for decentralisation and the need to grant constitutional status to Panchayati Raj Institutions (PRIs). Prior to the amendment, Panchayats largely functioned as advisory or administrative bodies with limited financial autonomy.
Article 243-I specifically mandates the creation of a Finance Commission at the state level to review and strengthen the financial position of Panchayats. It mirrors the functions of the Central Finance Commission (Article 280), but operates within the jurisdiction of the State Government.

Constitutional Mandate for the Governor

Under Article 243-I(1), the Governor of each State is required to constitute a Finance Commission within one year of the commencement of the 73rd Amendment Act. Thereafter, a Finance Commission must be established every five years. The periodic constitution of the Commission ensures that the financial framework for Panchayats remains dynamic and responsive to evolving developmental and fiscal needs.
The primary function of the Finance Commission is to review the financial position of Panchayats and to make recommendations to the Governor on matters relating to fiscal transfers and resource allocation between the State and Panchayats.

Functions and Recommendations of the Commission

As per Article 243-I, the Finance Commission submits its recommendations to the Governor on several critical areas, including:

• Distribution principles of the net proceeds of taxes, duties, tolls, and fees between the State and the Panchayats.
• Assignment of revenue sources such as taxes, duties, tolls, or fees to the Panchayats.
• Grants-in-aid to Panchayats from the State’s Consolidated Fund.
• Measures for improving the financial position of Panchayats through better fiscal management and capacity building.
• Any other matter referred to the Commission by the Governor in the interest of local financial administration.

These recommendations aim to ensure that Panchayati Raj institutions have a predictable and adequate flow of resources to perform their constitutional responsibilities effectively.

Composition and Appointment

Under Article 243-I(2), the State Legislature is vested with the power to determine the composition, qualifications, and manner of selection of the Finance Commission’s members. Typically, the Commission consists of a Chairperson and several other members with expertise in public finance, economics, rural development, or administration.
This flexibility allows states to tailor the Commission’s composition to local requirements while ensuring that members possess the necessary technical competence and experience.

Procedure and Powers

Article 243-I(3) authorises the Finance Commission to determine its own procedure, thereby granting it operational independence. Furthermore, the State Legislature may confer specific powers upon the Commission to facilitate the effective performance of its duties. These powers often include the ability to call for records, summon officials, and obtain information from departments concerning Panchayat finances.
The Commission typically engages in consultations with state departments, Panchayat representatives, and financial experts before finalising its recommendations.

Reporting and Legislative Oversight

As per Article 243-I(4), the Governor must lay the recommendations of the Finance Commission, along with an explanatory memorandum, before the State Legislature. The memorandum provides reasons for accepting or rejecting specific recommendations, ensuring transparency and accountability in fiscal governance.
This process reinforces the constitutional principle that financial devolution to Panchayats must be based on an informed, evidence-driven assessment rather than discretionary decisions of the executive.

Judicial Perspectives and Case Laws

Several judicial decisions have underscored the importance of financial autonomy and decentralisation in local governance:

• State of Karnataka v. Union of India (1977): Emphasised the significance of decentralisation in achieving participatory democracy and economic development at the grassroots.
• K. K. Verma v. State of Maharashtra (1990): Highlighted the necessity of financial stability and autonomy for the effective functioning of Panchayati Raj Institutions.
• S. R. Tiwari v. District Board, Agra (1964): Discussed the role of local bodies in the context of state administration, stressing their responsibility for local governance.

Although these cases predate the 73rd Amendment, they collectively illustrate the evolving judicial recognition of the constitutional role of local bodies in a decentralised polity.

Significance of Article 243-I

Article 243-I represents a cornerstone in the financial architecture of Panchayati Raj governance. Its significance may be summarised as follows:

• Enhancement of fiscal autonomy: It ensures that Panchayats have a constitutional claim over financial resources, promoting self-reliance and reducing dependency on higher tiers of government.
• Promotion of decentralised governance: It operationalises the principles of subsidiarity and participatory democracy by enabling decision-making at the grassroots level.
• Strengthening of fiscal accountability: Through regular review and transparent reporting, it fosters responsible financial management within local institutions.
• Equitable resource distribution: The Commission ensures that funds are distributed among Panchayats based on objective criteria such as population, area, and fiscal capacity.

Related Constitutional Provisions

Article 243-I functions in coordination with other provisions under Part IX of the Constitution:

• Article 243-A: Empowers Panchayats to function as institutions of self-government.
• Article 243-B: Provides for the constitution of Panchayats at the village, intermediate, and district levels.
• Article 243-C: Defines the composition and structure of Panchayats.