FM Tables 16th Finance Commission Report

Syllabus: GS2/ Polity

In News

• The 16th Finance Commission, constituted in 2023 under the chairmanship of Dr. Arvind Panagariya has had its key recommendations accepted by the Government for implementation during 2026–27 to 2030–31.

What is the Finance Commission?

• Constitutional Body: Established under Article 280 of the Indian Constitution.
• Formation: Constituted by the President of India every five years (or earlier).
• Composition: A Chairman and four other members.
• Core Function: It serves as a balancing wheel of fiscal federalism by recommending:
  • Vertical Devolution: The distribution of net tax proceeds between the Centre and the States.
  • Horizontal Devolution: The allocation of these proceeds among the States themselves.
  • Grants-in-Aid: Principles governing financial assistance to States from the Consolidated Fund of India (Article 275).
  • Local Bodies: Measures to augment State Consolidated Funds to support Panchayats and Municipalities.
• Nature of Recommendations: Advisory (not legally binding), though traditionally accepted by the Government.
• Note: Cesses and surcharges levied by the Centre are not part of the divisible pool.

Key Highlights

• Vertical Devolution (Tax Sharing):
  • Retained at 41%: The Commission recommended keeping the states’ share of the divisible tax pool at 41% (the same as the 15th FC).
  • The “Grand Bargain” Proposal: The report highlighted that while the share is 41%, the actual pool has shrunk because the Centre’s cesses and surcharges (which are not shared) have risen. It suggests folding these into the regular tax pool in the future.

• Disaster Management Grants:
  • New Disasters: The 16th FC recommended including Heatwaves and Lightning in the list of nationally notified disasters, allowing states to access central funds for these events.
  • Total Corpus: Rs 2,04,401 crore for the five-year period.
  • Allocation: 80% to the State Disaster Response Fund (SDRF) and 20% to the State Disaster Mitigation Fund (SDMF).
• Grants to Local Bodies:
  • Total Allocation: Rs 7,91,493 crore for rural and urban local bodies.
  • Performance Linked: Grants are split into Basic (80%) and Performance (20%) components.
  • Urbanization Premium: A Rs 10,000 crore fund to incentivize the merger of peri-urban villages into larger Urban Local Bodies (ULBs).
• Fiscal Roadmap:
  • State Deficit: Recommended capping states’ fiscal deficit at 3% of GSDP.
  • Union Deficit: A target to bring the Union’s fiscal deficit down to 3.5% of GDP by FY31.
  • End of Revenue Deficit Grants: Unlike previous commissions, the 16th FC has discontinued Post-Devolution Revenue Deficit Grants, urging states to improve their own tax administration.

Source: TH