Recommendations of the Sixteenth Finance Commission (SFC) for 2026-31
The SFC's recommendations have sparked concerns regarding the federal balance in India due to changes that favor central leverage over statutory equity. The Union government has accepted these recommendations, which include alterations in horizontal criteria and discontinuation of statutory grants.
Key Changes and Impacts
- The SFC maintained the states' share at 41%, but the effective share has decreased from 36% to 32%.
- The devolution formula adjustments have resulted in 14 states receiving a lower share of taxes, particularly affecting smaller and northeastern states.
- Significant reduction in revenue deficit grants, which previously supported fiscally weaker states.
- Sector-specific and state-specific grants-in-aid under Article 275(1) have been discontinued, weakening fiscal federalism.
Concerns with Devolution and Grants
- The SFC's reasoning for discontinuing revenue deficit grants based on a combined states’ revenue deficit of 0.3% of GDP is seen as erroneous.
- The shift to a consumer-oriented tax regime post-GST has altered state revenue dynamics.
- There is a failure to accommodate special area administration and tribal welfare needs as mentioned in Article 275.
- The SFC has not addressed GST Council dynamics, IGST settlement issues, and cost-of-collection variations effectively.
Article 282 and Third Tier Funding
- The SFC has doubled grants to the third tier (panchayats and urban local bodies), recommending nearly Rs 7.91 lakh crore.
- This shift from statutory to discretionary mechanisms raises accountability and predictability concerns.
- Equity-driven criteria have been replaced by efficiency-oriented criteria, compromising statutory grants' purpose.
Constitutional Considerations
The SFC has treated grants under Article 275 and Article 282 as interchangeable, which undermines the constitutional intent. Article 275 provides a statutory mechanism for fiscal support based on need, while Article 282 grants are discretionary and lack statutory obligation.
Federal Structure and Local Bodies
- The SFC has equated state needs with those of local bodies, which contradicts the constitutional hierarchy where states hold a direct constitutional status.
- Local bodies promote decentralization but operate under state oversight, and equating them with states jeopardizes the federal compact.
