INDICUS Authored By:Dr. Laveesh Bhandari Co-Authored By: Mr. V.N.Alok 1 State Finance Commissions and Panchayati Raj Institutions in India VN Alok vnalok@gmail.com Laveesh Bhandari laveesh@indicus.net Introduction A significant rise in local democracy has been noted in most developing countries with growing realization that devolution of political, administrative and fiscal authority to local units of government is one of the best ways to deepen democracy and increase efficiency. According to Wallace Oates (1972) “each public service should be provided by the jurisdictio n having control over the minimum geographic area that would internalize the benefits and costs of such provision”. The notion is based on the assertions that local governments are closest to the local residents and understand their preferences. It views that elected officials in a local government remain accountable for their performance to citizens. It promotes a sense of autonomy in citizens and improves social order. In practical economic terms, local public goods, under decentralized system, need to be provided considering the preferences of local residents. These local public goods, from the standpoint of traditional fiscal federalism, are devolved to the local governments by the upper level of governments (Shah, 1994). Such devolution of functions should be coupled with the concomitant revenue to maintain fiscal accountability of the local government. (Bird, 1993). Like many other countries, local governments in India are created through national constitution in early nineties with the enactment of the Constitution (Seventy-third Amendment) Act, 1992 known as the Panchayati Raj Act and the Constitutional (Seventy-fourth Amendment) Act, 1992 referred to as the Nagarpalika Act that put into effect on April 24, 1993 and June 1, 1993