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Public finance in India has entered a critical moment where the Sixteenth Finance Commission award, the Union Budget for 2026-27, and Kerala’s State Budget speak to each other in ways that bring to light the changing character of federalism itself. Each carries its own logic, but they all indicate a widening gap between national fiscal priorities and the developmental needs of states. At risk is not merely the arithmetic of revenue and expenditure, but the question of who decides economic policy in a federal system, and whose interests it ultimately serves.

The Sixteenth Finance Commission presents itself as a stabilising institution committed to continuity. It retains the states’ share in the divisible pool at 41% and preserves the framework of inter-state distribution. On paper this appears as steady federal practice. In reality, the fiscal environment has changed. The divisible pool itself has shrunk because the Union increasingly relies on cesses and surcharges that remain outside sharing arrangements. As a result, even an unchanged percentage can translate into reduced effective transfers. This tilts the balance of fiscal power toward the Centre while maintaining the appearance of constitutional continuity.

The Commission also changed the distribution formula in uncomfortable ways. By reducing the weight assigned to income distance and introducing a new parametre tied to contribution to national output, it rewards states that expand their economic footprint while placing additional pressure on those whose growth depends on public spending and social investment. For instance, Kerala’s modest rise in its horizontal share offers little comfort because it coincides with the withdrawal of revenue-deficit grants and several targeted transfers that had earlier supported the state’s finances. What appears as adjustment thus functions, in practice, as a tightening of fiscal support.

The Commission’s emphasis on fiscal discipline reinforces this change. It urges both Union and state governments to keep deficits and debt within narrow limits and to bring off-budget borrowings into official accounts. It also presses states to rationalise subsidies, review loss-making public enterprises, and move toward........

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