- In a pivotal moment for fiscal federalism, the 16th Finance Commission recalibrates Centre–State resource sharing amid rising constitutional and fiscal tensions.
About Finance Commission (FC)
- The Finance Commission (FC) is a constitutional body constituted by the President under Article 280 of the Constitution.
- It is a Quasi-Judicial body constituted every 5th year or at such an earlier time as the President deems necessary.
- It consists of a chairman and 4 other members to be appointed by the President. They are eligible for re-appointment.
Vertical Devolution Trends
- Higher Share: States’ tax share increased from 32% to 42% earlier and later fixed at 41% after Jammu & Kashmir’s reorganisation.
- Centre Concern: The Centre felt financial pressure and raised cesses, cut scheme funding, and avoided some 15th FC grants.
- Cess Issue: The Commission did not clearly restrict the growing use of temporary cesses & surcharges.
- Grand Proposal: It suggested merging cesses into regular taxes if States accept a smaller share of a bigger tax pool.
- Grants Stopped: Revenue deficit and special State grants were discontinued, reducing extra support to States.
- Lower Transfers: Transfers peaked at 35.6% (14th FC), fell to 34.4% (15th FC), and are estimated at 32.7% in 2026–27.
Horizontal Devolution
- New Criterion Introduced: A ‘contribution’ factor based on Gross State Domestic Product (GSDP) share was added to reflect efficiency.
- Efficiency Misplaced: GSDP reflects market advantages and migration patterns, not necessarily fiscal performance.
- Square Root Method: The square root of GSDP is used to soften excessive benefits to richer States.
- Discipline Removed: The tax effort/fiscal discipline criterion was dropped despite promoting fiscal responsibility.
Challenges
- Major Losses: States such as Madhya Pradesh, Uttar Pradesh, Bihar, West Bengal, Odisha, Chhattisgarh, and Rajasthan suffered greater losses than in the 15th FC.
- Small States: Northeastern States such as Arunachal Pradesh, Manipur, Meghalaya, Nagaland, Tripura, Sikkim, and Goa also faced losses.
- Uneven Gains: Gains among richer States were uneven, creating new regional imbalances.
- Formula Limits: Tax devolution alone cannot capture diverse cost and need differences across States.
Way Forward
- Article 275: Use Article 275 provisions to address State-specific needs beyond mere revenue deficits.
- Equalisation Focus: The estimate needs to equalise essential services like health & education across States.
- Performance Balance: Combine efficiency incentives for richer States with equity for poorer States.
- Norm Based: Prefer rule-based equalisation grants over ad hoc State-specific allocations.
“Balanced growth is the backbone of a strong federation.” Strengthening Article 275 grants and rule-based devolution ensures equity, efficiency, and cooperative Centre–State fiscal federalism.
Reference: The Hindu
UPSC Mains PYQs – Theme – Finance Commission
- [UPSC 2021 10M] How have the recommendations of the 14th Finance Commission of India enabled the States to improve their fiscal position?
- [UPSC 2013 10M] Discuss the recommendations of the 13th Finance Commission, which have been a departure fromthe previous commissions for strengthening the local government finances.
PMF IAS Pathfinder for Mains – Question 569
Approach
- Introduction: Write a brief introduction about the 16th Finance Commission.
- Body: Write about the 16th Finance Commission’s criteria for vertical and horizontal transfers, assess the implications for sub-national fiscal autonomy and cooperative federalism, and the way forward.
- Conclusion: Emphasis on cooperative federalism to ensure all States benefit fairly.
