Challenges for the Sixteenth Finance Commission (SFC)
The Sixteenth Finance Commission (SFC), effective from April 1, 2026, is tasked with revising financial devolution within a complex backdrop.
Key Issues
- States' Demand for a Larger Share:
- 22 out of 28 States, including BJP-ruled ones, request an increase in their share of the divisible pool from 41% to 50%.
- Shrinking Divisible Pool:
- The Union government increases revenue through non-shareable cesses and surcharges, raising their share from 12.8% (2015-16 to 2019-20) to 18.5% (2020-21 to 2023-24).
- This results in States' effective share decreasing to an average of 31% from 35% in previous years.
- Post-GST Reality:
- States have limited avenues to raise revenue independently.
- Dependency on central transfers is heightened, despite relatively good GST collections.
- Horizontal Devolution Formula:
- Current formula heavily weights population and income distance, perceived by progressive States as penalizing effective governance.
Possible Solutions and Considerations
- Balancing Act:
- A sudden increase to a 50% share might be impractical due to the Centre's rising expenses on defence and capital projects.
- A modest increase in States' share could be a compromise.
- Reining in Cesses and Surcharges:
- Recommendations could include capping them at a fixed percentage of the Centre’s gross tax revenue.
- Suggestions to include surplus collections in the divisible pool.
- Fine-tuning Horizontal Distribution Criteria:
- Create a balance between States' needs, area, and performance.
Conclusion
The SFC must craft a formula that is fiscally prudent and strengthens the federal structure, meeting States' demands while considering the Centre's fiscal constraints.
