Finance Commission proposals positive for states

But states may face short-term challenges

- FE BUREAU

THE RECOMMENDATIONS OF the 16th Finance Commission aimed at reducing rising revenue deficits and encouraging higher growth-oriented capital spending are expected to strengthen the long-term fiscal position of states, Crisil Ratings said in a report.

However, in the immediate term, states may continue to face pressures as additional fiscal support from the Centre remains limited, it said.

The Commission, a constitutional body responsible for recommending the sharing of financial resources between the Union and states for the period FY27-FY31, has decided to retain the vertical devolution—the share of states in the Centre’s tax revenues—at 41%, unchanged from the previous arrangement.

At the same time, a new parameter was added to the formula used to distribute tax revenues among states: the contribution of individual states to the national gross domestic product (GDP). This measure is intended to encourage states to prioritise investments that support long-term economic expansion, particularly through capital expenditure.