The Hindu Editorial Analysis
02 March 2026
Sixteenth Finance Commission — Misses and Concerns
(Source – The Hindu, International Edition, Page no.-10 )
Topic: GS Paper 2 – Polity | GS Paper 3 – Economy
Introduction
The Sixteenth Finance Commission (SFC) operated with considerable flexibility, as its Terms of Reference were rooted directly in constitutional provisions. Like earlier Commissions, it addressed two core dimensions of fiscal federalism:
- Vertical devolution (Centre–State distribution of revenues)
- Horizontal devolution (distribution among States)
While it retained certain structural continuities, several concerns arise regarding its methodology and implications.
I. Vertical Dimension
1. States’ Share in Divisible Pool
- Fourteenth Finance Commission raised States’ share from 32% to 42%.
- Fifteenth Finance Commission reduced it to 41% (post J&K reorganisation).
- Sixteenth Finance Commission retained 41%.
This gives continuity and semi-permanence to the higher devolution norm.
2. Rising Use of Cesses and Surcharges
- Cesses and surcharges are non-shareable with States.
- Their increasing use effectively reduces the divisible pool.
- The Commission noted the issue but made no concrete recommendation to limit them.
This weakens the spirit of fiscal federalism.
3. Discontinuation of Revenue Deficit and Sector-Specific Grants
- No continuation of revenue deficit grants.
- No recommendation of sector- or State-specific grants.
This reduces targeted support for States with structural fiscal gaps.
4. Trend in Resource Transfers
Share of transfers (tax devolution + grants) as percentage of Centre’s gross revenue receipts:
- 11th & 13th FC periods: ~27–28%
- 14th FC: 35.6%
- 15th FC: 34.4%
- 16th FC (2026–27 estimate): 32.7%
Although historically high, there is a declining trend since the 14th FC peak.
II. Horizontal Dimension
1. Introduction of “Contribution” Criterion
The Sixteenth Finance Commission introduced a new criterion to reflect efficiency, measured through GSDP.
However:
- It used the square root of GSDP, not direct GSDP.
- This moderated the weight of richer States.
2. Income Distance vs Contribution
- Income distance rewards poorer States.
- Contribution criterion favours economically stronger States.
Using GSDP in two opposite ways attempts to balance equity and efficiency.
3. Dropping the Tax Effort/Fiscal Discipline Criterion
- The fiscal efficiency criterion was removed.
- This weakens incentives for prudent fiscal management.
This move appears inconsistent with earlier reform narratives.
III. Losses and Gains
States reportedly losing relative share include:
- Madhya Pradesh
- Uttar Pradesh
- West Bengal
- Bihar
- Odisha
- Chhattisgarh
- Rajasthan
- Several North-Eastern States
Richer States did not uniformly benefit.
This indicates complex redistributive effects from formula adjustments.
IV. Equalisation and Revenue Gap Grants
Devolution alone cannot account for:
- Inter-State differences in service delivery costs
- Health and education expenditure needs
- Geographic disadvantages
Article 275 provides for grants-in-aid for States in need.
The discontinuation of revenue gap grants may undermine equalisation objectives.
Broader Federal Implications
Concerns
- Increasing reliance on non-shareable cesses.
- Removal of fiscal discipline incentives.
- Reduced emphasis on equalisation grants.
- Greater formula complexity without clarity of outcomes.
Positive Features
- Retention of 41% vertical devolution.
- Introduction of efficiency-oriented contribution criterion.
- Greater untied transfers relative to conditional grants.
Way Forward
- Rationalise and limit cesses and surcharges.
- Reintroduce a calibrated fiscal discipline criterion.
- Strengthen revenue gap grants through transparent norms.
- Improve predictability in projections and fiscal assumptions.
- Reinforce cooperative federalism through institutional dialogue.
Conclusion
The Sixteenth Finance Commission preserves headline continuity in vertical devolution but introduces changes in horizontal distribution that raise questions about equity, incentives, and equalisation. Fiscal federalism in India must balance efficiency with fairness. Without addressing the growing role of non-shareable revenues and the need-based grant architecture, cooperative federalism risks gradual erosion.