Key Messages of the 16th Finance Commission (FC-16)
The FC-16 recommendations emphasize five crucial messages concerning Centre-state fiscal relations:
- The Centre’s expenditure needs are as critical as those of the states.
- Fiscal performance matters, but it should align with states' developmental goals.
- Untied grants do not incentivize fiscal performance.
- Tied grants should align with national development goals.
- Grants to local bodies from the Centre are supplementary to state support.
Vertical Devolution to States
The share of the Centre’s divisible tax pool allocated to states has either remained constant or increased over recent Finance Commission cycles:
- Increased from 29.5% in FC-11 to 32% in FC-13.
- FC-14 raised it to 42% to compensate for resource loss post the merger of plan and non-plan expenditures.
- FC-15 adjusted it to 41% due to J&K's status change.
- FC-16 retained the 41% share, suggesting balanced growth needs between Centre and states.
Criteria for Horizontal Tax Distribution
FC-14 removed fiscal performance as a criterion and introduced demographic performance. FC-15 and FC-16 retained this but added GSDP as a share of GDP to capture efficiencies like spending and fiscal discipline.
Revenue Deficit Grants (RDG)
FC-16 discontinued RDG, which was previously provided to states with persistent revenue deficits. The decision emphasizes self-effort over reliance on central aid.
Tied Grants for Upgradation and Special Problems
While FC-14 discontinued these due to overlaps with central schemes, FC-15 reinstated them. FC-16 has discontinued them again, focusing on Article 282 for centrally sponsored schemes instead.
Grants to Local Bodies (LBs)
These grants have remained at 0.29% of GDP since FC-14, emphasizing the supplementary role of the Centre. FC-16 reiterates that local bodies are primarily state responsibilities.
Conclusion
FC-16's recommendations advocate for states to enhance self-reliance in resource generation, support national development goals, and engage local bodies as equal partners. These insights foster cooperative federalism.
