The recommendations of the Sixteenth Finance Commission (SFC) for the period 2026-31, which have been accepted by the Union government, have raised serious concerns about the future of federal balance.

The changes in the horizontal criteria, discontinuation of statutory grants, and tacit approval to the shrinking of the divisible pool have tilted the scales toward greater central leverage through discretionary transfers. This shift has come at the expense of statutory equity, further compounded by the doubling of transfers to the third tier. In making these unprecedented changes, SFC has taken liberties with the constitutional framework, thereby weakening the statutory backbone of fiscal federalism in India.

Even though the SFC retained the share of states at 41 per cent, it has overseen a reduction in their effective share from around 36 per cent to around 32 per cent. Further, by tweaking the devolution formula, 14 states, mostly the smaller states, have got a lower share in taxes than in the previous commission. The share in tax devolution, for example, of all northeastern states is 15.5 per cent lower than under the Fifteenth FC. This could have a crippling effect on the region.

More damaging is the discontinuation of revenue deficit grants, which had been accruing to the fiscally weaker states. So too the sector-specific grants, and state-specific grants-in-aid. These grants under Article 275(1) have been an important part of all the previous commissions’ awards.

Based on the combined states’ revenue deficit of 0.3 per cent of GDP, the SFC has reasoned, rather erroneously, that gap-filling has been rendered unnecessary. Not only should needs be assessed individually for states and not by aggregation, the SFC has failed to take cognisance of the........

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