The Finance Commission (FC‑16) submitted its report for the period 2026‑31. While it kept the vertical devolution of central taxes at 41%, it sharply reduced the share of grants‑in‑aid and moved toward performance‑linked grants. The changes raise questions about equity, the Constitution’s intent, and the balance of power between the Union and the States.
Key Developments
- Overall grants‑in‑aid reduced to ₹9.47 lakh crore, down from ₹10.1 lakh crore in FC‑15; its share of total FC transfers fell from 19.4% to 8.3%.
- All Revenue Deficit Grants and sector‑specific/state‑specific grants are eliminated.
- Devolution share to States remains at 41% despite 18 States demanding a rise to 50%.
- Introduces a “grand bargain” to gradually merge cesses into the divisible pool, while keeping State devolution unchanged.
- Performance‑based grants of ₹7.2 lakh crore earmarked for local bodies, linked to water‑sanitation, revenue mobilisation, and audited accounts.
Important Facts
The FC‑16 reduces the weight given to income distance from 45% to 42.5% and adds a 10% weight for contribution to GDP. Eight States, mainly in the North‑East and West Bengal, will see a lower share of both tax devolution and grants‑in‑aid. Six other States also face a decline in grant share.
While the Commission argues that eliminating RDGs will curb moral hazard, it does not propose a binding rollback of cesses and surcharges, even though many States have demanded it.
Exam Relevance
Understanding the FC‑16 is vital for GS‑3 (Economy) and GS‑2 (Polity) questions on fiscal federalism, inter‑governmental transfers, and the constitutional balance of power. The shift from equalisation to performance‑based incentives tests the principle of “fiscal justice” versus “fiscal discipline,” a recurring theme in UPSC essays on governance.
Way Forward
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