Strengthening fiscal federalism is central to cooperative governance. Examine the recommendations of the 15th Finance Commission and the issues likely to be flagged before the 16th Finance Commission.
Subtopic: Economy · Centre-State finances
How to structure your answer
Introduction: 16th Finance Commission under Arvind Panagariya was constituted in December 2023 for the award period 2026-31; 15th FC retained vertical devolution at 41%.
Body: 1) 15th FC — 41% vertical share, 2011 Census + demographic performance weight. 2) Issues — cesses and surcharges erode divisible pool (~18-20%), GST compensation sunset, off-budget borrowing by states. 3) Article 280 mandate and grants-in-aid under Article 275.
Way forward: Rationalise cesses; revise FRBM debt path for states; institutionalise GST Council and Finance Commission interface.
Written within the word limit
136 words · target 150 words · 9 min
Introduction: The 15th Finance Commission (Singh Chairman, 2020) recommended a vertical devolution of 41% of the divisible pool to States for 2021-26, retaining the post-J&K reorganisation calibration of the 14th FC's 42% benchmark.
Body: Horizontal devolution rests on income-distance (45%), population 2011 (15%), area (15%), demographic performance (12.5%), forest-and-ecology (10%) and tax-effort (2.5%) — penalising fertility-controlled southern states. Sector-specific grants of ₹1.3 lakh crore for health, ₹4.36 lakh crore for local bodies and ₹1.43 lakh crore for revenue-deficit states (FC-XV Report) sought equity. Issues to be flagged before FC-XVI (Pangariya Chairman, 2026-31 window) include the shrinking divisible pool due to cess-and-surcharge crossing 18% of gross tax (RBI State Finances 2024-25), GST compensation cessation, and OPS reversal fiscal risk in five states.
Way forward: The Ministry of Finance should statutorily cap cess-and-surcharge at 15% of gross tax revenue and merge it into the divisible pool from FY27 under FC-XVI's terms of reference.
What an examiner expects to see
- Vertical devolution 41% (15th FC)
- Divisible pool excludes cesses and surcharges — ~18-20% of gross tax revenue
- 16th FC chair Arvind Panagariya, period 2026-31
- Article 280 — Finance Commission
- Article 270 and 275 — devolution and grants-in-aid
- GST compensation sunset June 2022, cess extended to repay loans
Concrete cases, schemes and judgments
- 15th FC final report 2021-26
- Revenue deficit grants to 14 states
- Disaster Risk Management grants under 15th FC
- Local body grants — ₹4.36 lakh crore