Finance Commission strikes a new balance, Pg10

Key Highlights:

• The 16th Finance Commission (FC), covering 2026-2031, retains states' share of the divisible pool at 41%.
• Southern states' share increased from 15.8% (15th FC) to 17% due to reworked horizontal devolution criteria.
• The commission has suggested states discontinue off-budget borrowings, capping deficits at 3% of GSDP.
• Rationalization of subsidy schemes and introduction of sunset clauses for non-merit goods are recommended.

Detailed Insights:

• Concerns arose from southern states regarding potential erosion of political power and financial resources post-delimitation.
• The share of southern states in the divisible tax pool decreased from 21.1% (11th FC) to 15.8% (15th FC).
• States demanded an increased share in the divisible pool and resolution of growing cesses and surcharges.
• The 16th FC framework led to increased shares for Gujarat, Maharashtra, Punjab, and Jharkhand, while Uttar Pradesh, Bihar, Madhya Pradesh, and Rajasthan saw declines.
• The commission advocates for privatizing power distribution companies and closing/privatizing loss-making Public Sector Enterprises (PSEs).
• The Economic Survey has also articulated concerns over fiscal populism, which the commission is trying to address through its recommendations.

Key Concepts Involved:

• Divisible Pool: The portion of central government tax revenue that is distributed among states.
• Horizontal Devolution: The principles and formulas used to allocate funds among different states.
• Off-Budget Borrowings: Loans taken by state government entities that are not included in the state budget.
• Sunset Clause: A provision in a law or regulation that causes it to expire automatically after a specific date.