Finance commission strengthens local bodies, but at the cost of states, Pg11

Key Highlights:

• The Sixteenth Finance Commission (SFC) recommendations for 2026-31, accepted by the Union government, have sparked concerns about federal balance.
• SFC retained states' share at 41% but reduced their effective share from approximately 36% to 32%.
• Tax devolution shares for northeastern states are 15.5% lower compared to the Fifteenth Finance Commission.
• SFC discontinued revenue deficit grants and significantly increased grants to local bodies under Article 282, recommending nearly Rs 7.91 lakh crore.

Detailed Insights:

• The changes in horizontal criteria and the shrinking divisible pool increase central leverage through discretionary transfers, impacting statutory equity.
• Discontinuation of revenue deficit grants, sector-specific grants, and state-specific grants-in-aid affects fiscally weaker states.
• SFC's reasoning that gap-filling is unnecessary due to a combined states’ revenue deficit of 0.3% of GDP overlooks the post-GST reality.
• The shift from tax shares and grants towards Article 282 mechanisms raises concerns about condition-based discretionary transfers and accountability.
• Article 275(1) offers a safety net for equity through targeted fiscal support to states, while Article 282 grants are purely discretionary.
• By treating local bodies as another stakeholder, the SFC has bifurcated horizontal distribution, which doesn't align with the Constitution's basic structure.
• States are fundamental units with direct constitutional status, while local bodies have derived autonomy through state legislatures.

Key Concepts Involved:

• Fiscal Federalism: Division of financial powers and responsibilities between the central and state governments in a country.
• Divisible Pool: The portion of central government taxes that is shared with states as per the recommendations of the Finance Commission.
• Statutory Grants: Financial assistance provided by the central government to states as mandated by constitutional provisions.