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16th Finance Commission (2026-31)
Concerns have emerged over whether Finance Commission transfers adequately balance fiscal equity among States while addressing the Centre’s growing expenditure needs. The fiscal federalism, devolution, and State-level developmental autonomy.
16th Finance Commission and Fiscal Devolution:
| Dimension | Key Details |
|---|---|
| Constitutional Basis | The 16th Finance Commission has been constituted under Article 280 of the Constitution. |
| Chairperson | The 16th Finance Commission is chaired by Dr. Arvind Panagariya. |
| Award Period | The award period of the 16th Finance Commission is 2026–31. |
| States’ Share | States’ share in the divisible pool of central taxes remains unchanged at 41%. |
| Grant-in-Aid | Total grant-in-aid worth ₹9.47 lakh crore has been recommended for local bodies and disaster management over 5 years. |
| Discontinued Grants | Revenue-deficit, sector-specific, and state-specific grants have been discontinued. |
| Shrinking Divisible Pool | Rising non-shareable cesses and surcharges reduce the actual funds available to States. |
| Equity vs Performance | High income-distance weightage benefits less developed States, while developed States feel penalised for economic and demographic performance. |
| Conditional Transfers | Tied grants may constrain States’ flexibility in deciding their own spending priorities. |
| Vertical Imbalance | States bear major expenditure responsibilities in health, education, and welfare but have limited taxation powers. |
| NREGA Cost Sharing | Restructuring of the National Rural Employment Guarantee programme requires States to bear 40% of programme costs. |
| Revenue-Deficit Grants Issue | Removal of revenue-deficit grants raises concerns about equity and targeting of specific State needs. |
| Tyranny of Base Year | The discontinuation of revenue-deficit grants has been described as the tyranny of the base year. |
| Way Forward | Cesses and surcharges should be rationalised to expand the divisible pool and strengthen cooperative federalism. |
| Criteria Reform | Devolution criteria should balance equity with incentives for fiscal discipline. |
| Developmental Autonomy | Predictable and untied transfers can improve State-level developmental autonomy. |