16th Finance Commission 2026-31: Devolution Formula and Criticism
Why in the news
The 16th Finance Commission submitted its report for 2026-31. It left vertical devolution unchanged but altered the way money is shared among states, which drew criticism from poorer states.
Key facts
- States’ share in the divisible pool stays at 41%, as under the 15th Finance Commission.
- Grand bargain: states take a smaller share of a larger pool if the Centre folds most cesses and surcharges into taxes that are shared.
- Horizontal formula now gives more weight to economic performance.
- Local bodies: grants of ₹8 lakh crore, split as ₹4.4 lakh crore rural and ₹3.6 lakh crore urban, tied to constituted bodies, audited accounts and timely State Finance Commissions.
- Disaster management: ₹2.04 lakh crore; cost sharing 90:10 for northeastern and Himalayan states, 75:25 for others.
Horizontal devolution weights
| Criterion | Weight | Note |
|---|---|---|
| Income distance | 42.5% | Gap between a state’s income and the average of the top three states; reduced from 45% |
| Population (2011 Census) | 17.5% | Reflects expenditure needs |
| Demographic performance | 10% | Rewards lower population growth between 1971 and 2011 |
| Forest and ecology | 10% | Open forests now counted along with dense forests |
| Area | 10% | Same weight as before |
| Contribution to GDP | 10% | New; share in all-state GSDP, square-root method; replaces tax effort and fiscal discipline |
New grants
- Urbanisation Premium Grant: ₹10,000 crore for areas turning from rural to urban.
- Special Infrastructure Grants: ₹56,100 crore for wastewater management.
Fiscal roadmap
- Central deficit target 3.5% of GDP by 2030-31; states 3% of GSDP.
- End off-budget borrowings and count them in deficit and debt.
- Encourage privatisation of DISCOMs.
- Rationalise subsidies: unconditional cash transfers are now 20.2% of subsidy spending versus 3% in 2018-19, helped by the JAM trinity.
- Close 308 inactive state PSEs; review loss-making ones.
- Publish CAG-certified net tax proceeds yearly under Article 279, defined as gross revenue minus collection cost.
Concerns
- States wanted about 50% but got 41%; critics say the Centre’s needs were put first.
- No cap on cesses and surcharges, which are outside the shareable pool.
- The GDP-contribution weight favours industrialised states such as Tamil Nadu, Karnataka and Maharashtra.
- Revenue deficit grants were dropped, hurting hill, northeastern and structurally weak states.
- Conditions on deficits, off-budget debt, subsidies and DISCOMs cut states’ flexibility.
- Likely losers versus the 15th Commission include Uttar Pradesh, Bihar, West Bengal, Madhya Pradesh, Odisha, Goa and many northeastern states; regional inequality may widen.
- No Article 275 grants for state-specific needs like health and education.
Way forward
- Raise the states’ share above 41% and cap cesses and surcharges, for instance at 10% of gross tax revenue against nearly 20% now.
- A floor guarantee so no state gets less than under the 15th Commission during the transition.
- Balance equity and efficiency with elasticity-linked transfers.
- Matching grants to states that follow SFC advice; real taxation powers for local bodies.
- Revive the Inter-State Council (Article 263) for dialogue over litigation.
Exam angle
- Share of states in divisible pool: 41%.
- New criterion: contribution to GDP (10%), square-root method.
- Article 279: net proceeds; Article 263: Inter-State Council; Article 275: grants.