Sixteenth Finance Commission (FC-16) Recommendations
The Sixteenth Finance Commission (FC-16) has presented its recommendations concerning the fiscal distribution between the Centre and the States for the period 2026-31.
Vertical Devolution Ratio
- The States' share in the divisible pool of Central taxes is retained at 41%.
- States desired an increase to 50% due to their tighter fiscal spaces under the GST framework.
- The mismatch between expenditure responsibilities and assured revenues has led states to rely on market borrowings.
Horizontal Devolution Formula
- The "tax effort" criterion is reworked into a "contribution to GDP" measure.
- The weight of this measure is raised significantly from 2.5% under FC-15 to 10%.
- This aims to reward productive and efficient states, linking governance outcomes with fiscal transfers.
- The change is implemented gradually to avoid redistributive shocks to states dependent on transfers.
Demographic and Population Considerations
- The weight for demographic performance is reduced, acknowledging the nearing of India's demographic dividend peak.
- The weight for population size is modestly increased.
- Industrialized states like Tamil Nadu and Maharashtra see only incremental improvements in their shares.
Concerns and Recommendations
- The FC-16 stops short of correcting the shrinking of the divisible pool due to cesses and surcharges.
- Total transfers to states are expected to rise by 12.2% between 2025-26 (RE) and 2026-27 (BE).
- ₹1.2 lakh crore, or about 42% of this increase, is from revenue transfers under Centrally Sponsored Schemes, reinforcing a centralised governance model.
Conclusion
While FC-16 acknowledges the fiscal challenges faced by states, it does not advocate for significant structural changes necessary to rebalance fiscal federalism.
