In less than four months from now (October 2025), the Sixteenth Finance Commission (SFC) has to wind up its assessment and submit a report so that recommendations can be accommodated in the Union budget of 2026-27 as well as the State budgets. This would not only ensure commencement of the SFC recommendations (1-04-2026) in time but also enable the national and sub-national economies a safe landing in 2031. The Commission may also prefer to go the last Finance Commission’s way and submit the first year’s recommendation early, keeping the reports about remaining years in abeyance for the time being.
The SFC was constituted well in time (Dec 2023) under the chairmanship of Arvind Panagariya and two other members. Thereafter, right from January 2024, Mr. Panagariya was on the move from State to State and also meeting various autho – rities. Since visiting the States has almost come to an end, it can now safely be surmised that the Commission is engaged in drafting with full force and vigour. This time, the States are ex – pecting some positive awards from the 16th FC, especially taking into account their two major demands, namely 1) adopting a set of more effective criteria for determining the rational share of each State from the divisible pool of taxes and 2) enhancing the total share to be devolved to the States. The divisible pool of taxes refers to the “net proceeds of all taxes (after deducting cess, surcharge, and cost of collecti – on) collected by the Union, which is sharable with the States. The 11th FC shared 29.5 per cent of the divisible pool with the States. It marginally increas – ed to 30.5 per cent in the 12th FC, 32 per cent in the 13th FC, 42 per cent in the 14th FC, and 41 per cent in the 15th FC.
Almost all Indian states ~ irrespective of their size of per capita income and GSDP ~ depend largely on the funds transferred by the Union government to varying degrees. Each state receives its specified share of central taxes and other grants-in-aid as approved by the commission. Even the most developed states have to rely on the FC’s funds for an average of 23-25 per cent of their total budgetary requirements. For example, Maharashtra’s own resources could cover only 74 per cent of the State’s requirements (2024-25). For the remaining part, the State has to depend on the amount received through central transfer. Similarly, Karnataka, another developed State, could cover only 78 per cent of its requirement from its own revenues ~ the gap is bridged by funds that come from the Centre. Other similarly placed states with the proportion of their own revenue sources are Andhra Pradesh (57 per cent), Kerala (76 per cent), Tamil Nadu (74 per cent), Telangana (72 per cent), Gujarat (73 per cent), Rajasthan (59.55 per cent), and West Bengal (46.0 per cent).
This position underlines the gravity of the fiscal situation of the States. Apart from FC grants and the tax devolutions received from the Centre, the States in their effort to bridge the gap, rely continually on borrowing. It was under this backdrop that States submitted their memoranda before the Commission. Mr Panagariya recently disclosed at a press conference that 22 out of 28 States ~ including Uttar Pradesh ~ have advocated devolution of a 50 per cent share from the divisible pool of resources. This time, however, it will be tough for the Finance Commission to come to a decision about devolving funds to this extent to the States. It is already in the air that the Union government is not in favour of enhancing the states’ share; rather it may press the Commission to reduce the share to 40 per cent.
Mr. Panagariya, has already in a way negated the demand of the States saying that, “Practically speaking, I can’t tell you (the press) what the commission will do because I also don’t know it yet, as it’s a decision of the full membership of the commission. What I can speculate, though, is it is not going to be 50 per cent because that would be too large a jump, and such a large jump would upset too many carts.” In a recent move, Tamil Nadu Chief Minister M.K. Stalin, while attending the 10th General Council Meet of the NITI Aayog, told PM Modi that the Centre must consider devolution of at least 50 per cent of Central taxes.
Enhancement of the devolution proportion has been a cause of concern for many other states as well, especially when the approved proportion is also not devolved by the Centre under the pretext of a shortage of funds. However, in view of the “speculation” of Mr Panagariya, it is to be expected that he will take the middle path and attempt to maintain an equal distance from both Centre and States ~ with a slight tilt towards Centre. In this context it is worth noting that the 14th Finance Commission (2015-20) faced the tremendous task of reinvigorating the deteriorating fiscal situation of States in the face of the sudden stoppage of funds flow from the Planning Commission.
Another challenge in the context of restricting fund flows to states before the 14th FC was to examine Central intervention in the State list by way of implementation of some centrally-sponsored schemes. The revenue receipts position of states received a big jerk when the Centre suddenly abolished the Planning Commission, resulting in a stoppage of plan funds. The 13th Finance Commission allocated 31 per cent of the divisible pool of resources to the States. The 14th FC had to take care of the changing situation, and as a step towards relief to the States recommended 42 per cent of the share of the divisible pool of resources.
The Commission in its report stated that it was necessary to bridge the gap created by the abolition of the plan funds. The allocation of funds by the 15th FC in terms of the proportional share appeared to be lower than the allocation made by the 14th FC in the case of some high-performing States in the areas of economic de velo – pment. The States which suffered such low allocation are Andhra Pradesh (4.3 per cent, 4 per cent ~ of the two figures within the attached parenthesis, the first is for 14th FC and the second is for 15th FC), As sam (3.31, 3.13), Karnataka (4.713, 3.65), Kerala (2.50, 1.93), Odisha (4.64, 4.53), Telangana (2.42, 2.1), UP (17.95, 17.93), etc. Although in absolute terms, the present proportions yielded a higher amount, yet the absolute amount yielded by the lowest and the highest proportion varied further, indicating further discrepancy in the allocations.
These states are now claiming a fair deal in terms of fixation of proportion. However, this will be possible only when the criteria considered for devolution of funds are either reviewed or rationalised. The criteria for devolution of funds for the 14th and 15th FC were more or less similar. These two commissions followed five criteria frameworks for determination of the proportion of the share of each state. Each criterion is attached with a specific weight in the form of a percentage. For example, the 15th FC gave 45 per cent weightage to deviation from the highest perca pita income, 15 per cent weightage to population, 15 per cent weightage to the area, and 12.5 per cent weightage to demo graphic performance (newly introduced). 10 per cent weightage to forest and ecology and 2.5 per cent to tax and fiscal efforts.
One serious objection levelled against the Union government is the shortfall in the disbursement of the States’ share of various grants-in-aid. The 15th FC recommended the release of funds to the States under various headings. Some of these are transferred to the States as grant-in-aid, and others are transferred as normal budgetary provisions. For example, post-devolution revenue deficit grants, local bodies grants, disaster management grants, etc., are transferred to the States as grant-in-aid. The total transfer recommended under these three heads was Rs 845,026 crore. Out of this, the Central government till October 2024 had released only Rs 559,698 crore, or 66.23 per cent of the allocation. The remaining amount of Rs 285,328 crore is yet to be re – leased. Of these three schemes, more than 90 per cent of the recommended amount was released in the case of a post-devolution revenue deficit grant.
On the other hand, only around 50 per cent was released in the case of local bodies’ grants. In the case of disaster management grants, the release was to the tune of 66.75 per cent.
Such shortfalls appearing at the time of releasing amounts recommended by the Finance Commissions has become a normal phenomenon today. The shortfall usually occurs more in the case of grants-in-aid meant for the rural local bodies. Moreover, a funds crunch is not always the main reason for non utilisation of Finance Commission awards ~ sometimes time constraints also prevent spending of resources in hand. The 16th FC, as it appears, will not take much time to disclose the awards allocated under various heads, as they have already made up their mind on the crucial question of expanding the divisible pool of taxes. They will attempt to expand the tax bases but not the magnitude of the share. The situation for the 16th FC is much easier than what was faced by the 10th, 11th, and 14th Finance Commissions.
(The writer is a former IAS officer, who retired as Secretary, Finance, Government of Assam)