16th Finance Commission Strikes a Balance on Equity and State Concerns
The 16th Finance Commission, covering the period from 2026 to 2031, has made significant strides in addressing long-standing demands from states, particularly those in the southern region. Amidst growing apprehensions over the federal compact ahead of the delimitation exercise following the upcoming Census, the Commission has worked to ensure a fair distribution of financial resources while maintaining equity.
Addressing Southern States' Apprehensions
Governments and leaders in southern states, including Andhra Pradesh, Telangana, Karnataka, Tamil Nadu, and Kerala, have expressed fears of erosion in their relative share of political power and financial resources. Historically, the share of the southern region in the divisible tax pool declined from 21.1% under the 11th Finance Commission to 15.8% under the 15th Finance Commission. This decline occurred as the pool was constrained by the Centre's increased levy of cesses and surcharges, revenues from which are not shared with states. States have been vocal in demanding not only an increase in their share but also a resolution to the issue of growing cesses and surcharges.
Key Decisions and Adjustments
In this context, the 16th Finance Commission has attempted to strike a delicate balance. It has kept the vertical devolution intact, retaining the states' share in the divisible pool at 41 per cent. However, in determining the horizontal devolution, the Commission has deviated from previous approaches by reworking the criteria and weights used. For instance, it has adjusted the weights assigned to factors such as population and introduced the criterion of a state's contribution to GDP. Based on this revised framework, the share of southern states has increased from 15.8 per cent under the 15th Finance Commission to 17 per cent. Other states that have seen an increase include Gujarat, Maharashtra, Punjab, and Jharkhand, while states like Uttar Pradesh, Bihar, Madhya Pradesh, and Rajasthan have experienced a decline.
Recommendations on State Finances
The Commission has also put forward several welcome recommendations aimed at improving state finances. It has argued that states should discontinue the practice of incurring off-budget borrowings while keeping the deficit capped at 3 per cent of Gross State Domestic Product (GSDP). In light of concerns over fiscal populism, as articulated by the Economic Survey, the Commission has recommended the rationalisation of subsidy schemes and the introduction of sunset clauses for schemes that provide subsidies on non-merit private goods and unconditional transfers. Additionally, the Commission has advocated for moving forward on privatising power distribution companies and the closure or privatisation of loss-making or inactive public sector enterprises. These recommendations are seen as reasonable and urgent for implementation.
Conclusion
Overall, the 16th Finance Commission has made a concerted effort to address the equity concerns of states, particularly those in the south, while maintaining a stable vertical devolution. By adjusting horizontal devolution criteria and proposing fiscal reforms, it aims to foster a more balanced and sustainable financial framework for the period from 2026 to 2031.
