In its much-awaited recommendations, which were also tabled on Sunday, the Sixteenth Finance Commission (FC-16), as anticipated, has recommended that the vertical devolution ratio — the States’ share in the divisible pool of Central taxes — be retained at 41% for the period 2026-31. This is despite the Commission acknowledging the tightening fiscal space States face under the GST framework, and that the growing mismatch between expenditure responsibilities and assured revenues has increasingly left them with “recourse to market borrowings” as the principal adjustment mechanism. This change is intended to reward productive and efficient States and represents a modest but meaningful attempt to link governance outcomes with fiscal transfers. To be sure, total transfers to States are budgeted to rise by 12.2% between 2025-26 (RE) and 2026-27 (BE). The FC-16’s recommendations recognise the stresses in State finances but do not push for the structural change needed to restore the balance in fiscal federalism.

Source: The Hindu February 03, 2026 02:11 UTC