16th Finance Commission (FC)

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Why in News?

The 16th Finance Commission has retained the 41% States’ share in the divisible pool while revising horizontal criteria, leading to differential outcomes for southern States, including only a marginal gain for Tamil Nadu.

Description:

Finance Commission – About:

  • Nature: Constitutional body under Article 280.
  • Constituted by: President of India every 5 years or earlier.
  • Composition: Chairman + 4 other members, appointed by the President for a specified term.
  • Parliamentary procedure: Under Article 281, FC Report and Action Taken Memorandum (ATM) are laid before Parliament.

16th Finance Commission:

  • Constituted: 2023
  • Chairman: Dr. Arvind Panagariya
  • Implementation period: 2026–27 to 2030–31
  • Status: Key recommendations accepted by the Government of India.

Key Recommendations:

1.    Vertical Devolution:

  • States’ share in the divisible pool: 41%
  • Status: Unchanged from the 15th Finance Commission.
  • Divisible Pool includes: Gross tax revenue excluding Cost of collection, Cesses and surcharges

2.   Horizontal Devolution:

(Distribution of the 41% among States)

  • New/Modified Criteria Effects:
    • Inclusion of Contribution to GDP as a criterion.
    • Reduced weight to income distance and area.
  • Impact:
    • Southern States collectively gain higher devolution.
    • However, gains are uneven across southern States.

3.   Fiscal Discipline & Macro Stability:

  • State fiscal deficit cap: 3% of respective GSDP.
  • Exclusion: Loans under Special Assistance to States for Capital Investment (SASCI) are excluded from this cap.

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