The Sixteenth Finance Commission’s (SFC) recommendations have recently been accepted by the Government of India, and the reports of the Commission were tabled in Parliament on the day of the budget by the Union Finance Minister. The government was quick to allocate an amount of Rs 15.26 lakh crore in the 2026-27 budget for transfer to the states as a part of their share of net central taxes.

This provision is unique because it was included in the budget well before the reports were tabled in the House and before the customary notification regarding the acceptance of the recommendations and guidelines had been issued. The States did not know their respective shares in the devolution of central taxes nor the grant funds allocated in the budget. The Commission’s report appears to be somewhat different from those of previous commissions in terms of its structure and also in terms of the awards. The Commission has not clearly shown the anticipated amounts that would be available in each year of the commission’s period to the states.

So, this has to be worked out separately by each State. As per the terms of reference, the first task of the Commission is to identify the size of the divisible pool of resources (vertical sharing) out of the net tax revenue of the Union which is shareable with the States. While setting up this pool, the Commission needs to examine carefully how big the size of the excluded items, such as surcharge, cess, etc., is and how the volume of these items is growing over time, which finally exclusively remains with the Union government. Government data shows that surcharge and cess have been growing at a rapid rate for the last five years, and the finance commission should have a look at this stock with the Union Government while determining the divisible pool.

Unfortunately, the SFC, which was in a better position to take this into account, remained neutral towards this, and the divisible pool was just set up at the same rate, keeping aside advantages accrued to the Union from collection of surcharges, cess, collection charges, etc. The last Finance Commission (15th FC or FFC) had fixed the divisible pool at 41 per cent of the net central taxes. There were hints from the Government of India that this should not be enhanced further. On the other hand, the non-BJP States have been pressuring Mr Arvind Panagariya to enhance the pool from the present 41 per cent to 50 per cent. This demand was politely rejected by Mr Panagariya at a press meet last year, 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.” But the 16th FC preferred to follow the guidelines of the Government of India, and a reading of their report clearly shows that it has tilted towards central expectations. The Commission has not listened to the States’ demand for enhancement of the divisible pool of resources. There are contentions from various quarters that the divisible pool of the 15th FC and that of the 16th FC are not the same ~ as the present 41 per cent has almost doubled by now. But they have forgotten that this contention is equally true for the other part of the share, i.e., the 59 per cent at the disposal of the Government of India. For the horizontal fixation of the share of each State, the SFC has rearranged the criteria adopted by the FFC.

It has replaced the tax effort criterion with the contribution to GDP criterion. As a result, the states with high GSDP are coming to the forefront, and those with low GSDP are taking a backseat. It also changed the weightage of four criteria, namely, income criteria or the ‘GSDP distance’ from 45 per cent to 42.5 per cent; ‘population’ from 15 per cent to 17.5 per cent; ‘demographic performance’ from 12.5 per cent to 10 per cent; and ‘area’ from 15 per cent to 10 per cent. Then a new criterion, ‘contribution to GDP of India’, has been added, replacing the ‘tax and fiscal effort’ with a weightage of 10 per cent. Depending on these criteria, the Commission has calculated the proportion that a State is entitled to of the divisible pool.

The highest roportion goes to Uttar Pradesh with 17.62 per cent, followed by Bihar with 9.95 per cent, Madhya Pradesh at 7.35 per cent, West Bengal at 7.22 per cent, Maharashtra at 6.44 per cent, etc. The government proposes to transfer an amount of Rs 15.26 lakh crore from the divisible pool of resources to States in the year 2026-27. Of this amount, the highest amount will go to UP with Rs 2.69 lakh crore, followed by Bihar with Rs 1.52 lakh crore, MP with Rs 1.12 lakh crore, West Bengal with Rs 1.10 lakh crore, Maharashtra with Rs 0.98 lakh crore, etc. The SFC has recommended discontinuation of three grants usually provided to the States by the previous FCs under the head of 1) revenue deficit grants, 2) sector-specific grants and 3) State-specific grants.

The 15th FC had allocated an amount of Rs 2.9 lakh crore under deficit grant to 17 States which could not make up their budgetary gaps created due to revenue deficits. Similarly, under sector-specific grants, the FFC had allocated an amount of Rs 1.3 lakh crore for the development of health, school education, higher education, agricultural reforms, judiciary, statistics, etc. Another developmental grant recommended by the FFC was the state-specific grant to be allocated for the development of areas such as social needs, administrative governance and infrastructure, water and sanitation, etc., covering an amount of Rs 49,599 crore. The States getting the benefits of these three grants will be deprived of these funds during the SFC period due to their discontinuation. The other grants, like local body grants and disaster management grants, are to continue as before with slight changes here and there.

In respect of the local body grants, the Commission has imposed several strict conditions to be fulfilled by both the government and local bodies before releasing the specified share recommended for this purpose. The SFC has divided the local body grants into three parts ~ 80 per cent of the grants are named as basic grants, and 50 per cent of this basic grant is untied, while the remaining 50 per cent is tied to spending on sanitation and solid waste management and water management. The remaining 20 per cent are performance grants. The release of ten per cent of this is related to the performance of the State government, while the remaining ten per cent is subject to the performance of the local governments.

The Commission recommended an amount of Rs 435,236 crore for rural local bodies, of which Rs 348188 crore is for basic grant and Rs 43524 crore each for performance grant. Similarly, Rs 290,157 crore is the basic grant in respect of urban local bodies, of which Rs 29016 crore is the performance grant for urban local bodies and the government. As usual, the highest amount, Rs 83,262 crore, will go to Uttar Pradesh, followed by Rs 32,819 crore to Maharashtra, which is less than half of the amount for UP. The government has budgeted a lump-sum amount of Rs 55,909 crore as a basic grant for rural local bodies and Rs 37,272 crore for urban local bodies. The other two components of ULBs, viz., the special infrastructure component and the urbanisation premium, also have been accommodated in the budget with amounts of Rs 6000 crore and Rs 2000 crore, respectively for the coming year.

The Commission accepted the principle of allocation of funds for disaster management grants followed so far and allocated an amount of Rs 204401 crore for this purpose. 80 per cent of this fund has been earmarked for the State Disaster Response Fund (SDRF), and the remaining Rs 40880 crore is for the State Disaster Mitigation Fund (SDMF). Of the total fund, 25 per cent is the state’s contribution (10 per cent in respect of NE states). Thus, the total central fund comes to Rs 155916 crores for the whole five-year period. The highest amount is allocated against Maharashtra with Rs 29,619 crore, followed by UP with Rs 15,321 crore and Bihar with Rs 13,615 crore. The amount allocated for West Bengal is Rs 6869 crore. The government has budgeted the full amount, as allocated by the Commission for SDRF and SDMF for 2026-27, i.e., Rs 28,216 crore.

(The writer is a former IAS officer who retired as Secretary Finance, Government of Assam)

Union Finance Minister

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