"16th Finance Commission report raises equity concerns over grants restructuring"
Vertical devolution
the share of Union's net tax proceeds transferred collectively to all States
Horizontal devolution
distribution of States' collective share among individual States using a weighted formula
The Finance Commission (FC) is a constitutional body established under Article 280 of the Indian Constitution, constituted by the President every five years. Its foundational mandate is to recommend the distribution of the Union's net tax proceeds between the Centre and the States — vertical devolution — and among the States themselves — horizontal devolution — as well as grants-in-aid to States under Article 275. The rationale for this institution rests on two structural imbalances: a vertical imbalance (the Centre collects more than it spends while States spend more than they collect) and a horizontal imbalance (fiscal capacities vary enormously across States due to history, geography, and institutional development).
From the First FC onwards, the Commission has served not merely as a fund allocator but as a corrective institution — one designed to mediate the asymmetry between a fiscally dominant Union and structurally constrained States. Equity-oriented criteria, particularly income distance (the gap between a State's per capita income and the highest-income State), have historically dominated the horizontal distribution formula, reflecting the constitutional intent to reduce inter-State disparities. The 14th FC recommended a vertical share of 42% for States; the 15th FC marginally reduced this to 41% to account for the creation of Jammu & Kashmir and Ladakh as Union Territories. Grants-in-aid under successive Commissions — including Revenue Deficit Grants (RDGs), sector-specific grants, and State-specific grants — have served as targeted equalisation instruments where formula-based devolution falls short.
The divisible pool is the pool of Union tax revenues from which States receive their share; it excludes cesses and surcharges, which have grown to exceed 15% of gross tax revenues. This exclusion structurally reduces the effective quantum transferred to States, making the nominal vertical share figure somewhat misleading. Cesses and surcharges are thus a source of persistent tension in Centre-State fiscal relations: they expand Union revenues without expanding the divisible pool.
Horizontal devolution distributes the States' collective share among individual States using a weighted formula. The 16th FC (chaired by Arvind Panagariya, covering 2026–31) uses six criteria: income distance (42.5%), population (17.5%), area (10%), forest cover (10%), demographic performance (10%), and a new GDP-contribution criterion (10%). The reduction in the weight of income distance from 45% (under the 15th FC) to 42.5%, and the introduction of the GDP-contribution criterion, represents a marginal but symbolically significant shift from equity toward efficiency in the formula's architecture. …
With reference to the recommendations of the 15th Finance Commission of India, which of the following statements are correct?
I.It has recommended grants of ₹4,800 crores from the year 2022-23 to the year 2025-26 for incentivizing States to enhance educational outcomes.
II.45% of the net proceeds of Union taxes are to be shared with States.
III.₹45,000 crores are to be kept as performance-based incentive for all States for carrying out agricultural reforms.
IV.It reintroduced tax effort criteria to reward fiscal performance.
Select the correct answer using the code given below.
Which one of the following is not a feature of Indian federalism?
With reference to the 16th Finance Commission's recommendations, consider the following statements:
1.The vertical share of States in the divisible pool has been increased from 41% to 45%.
2.Revenue Deficit Grants to States have been eliminated.
3.Grants-in-aid have been restricted to local bodies and disaster management.
Which of the statements given above is/are correct?
Which of the following is/are excluded from the 'divisible pool' of Union taxes from which States receive their share?
1.Income tax collected by the Union
2.Cesses levied by the Union
3.Surcharges levied by the Union
Select the correct answer using the code given below:
Consider the following pairs — Finance Commission criterion and its weight in the 16th Finance Commission's horizontal devolution formula:
1.Income distance — 45%
2.Population — 17.5%
3.GDP contribution — 10%
4.Forest cover — 15%
How many of the above pairs are correctly matched?
Under which Article of the Indian Constitution does the Finance Commission recommend grants-in-aid to States?
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