Opinion Finance Commission strikes a balance – addresses southern states’ concerns, and equity

Ahead of the delimitation exercise, which is expected to follow the upcoming Census, there are concerns that the federal compact could be affected. Governments and leaders in southern states have expressed apprehensions that they could be at the receiving end, in terms of an erosion of their relative share in political power and also financial resources. The share of the southern region, which includes the states of Andhra Pradesh, Telangana, Karnataka, Tamil Nadu and Kerala, in the divisible tax pool declined from 21.1 per cent under the 11th Finance Commission to 15.8 per cent under the 15th Finance Commission. This decline occurred even as the pool was constrained with the Centre stepping up the levy of cesses and surcharges, revenues from which are not shared with states. States have been demanding not only an increase in their share in the divisible tax pool but also that the issue of growing cesses and surcharges be addressed. In this context, the 16th Finance Commission has tried to strike a balance, while keeping in mind concerns of equity.

The Commission, which covers the period from 2026 to 2031, has kept the vertical devolution intact, retaining the states’ share in the divisible pool at 41 per cent. But, in determining the horizontal devolution, it has deviated from the previous Commission on the criteria and weights to be used. For instance, it has reworked the weights assigned to some criteria such as population, while also adding the criterion of the state’s contribution to GDP. Based on its framework, the share of the southern states has increased from 15.8 per cent under the 15th FC to 17 per cent. Others that have also seen an increase are Gujarat, Maharashtra, Punjab and Jharkhand, while states like Uttar Pradesh, Bihar, Madhya Pradesh and Rajasthan have seen a decline.

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The Finance Commission has also made some welcome recommendations in areas such as state finances. For instance, it has argued that states should discontinue the practice of incurring off-budget borrowings, while keeping the deficit capped at 3 per cent of GSDP. Considering the concerns over “fiscal populism”, also articulated by the Economic Survey, the Commission has recommended the rationalisation of subsidy schemes and the introduction of “sunset clauses” for schemes that give subsidies on non-merit private goods and unconditional transfers. The Commission has also sought to move the needle on privatising power distribution companies and on the closure or privatisation of loss-making or inactive public sector enterprises. These are reasonable recommendations that should be acted on urgently.