16th Finance Commission proposals long-term positive for states: CRISIL Ratings

The recommendations of the 16th Finance Commission (FC), which emphasise reducing revenue deficits and boosting growth-oriented capital spending, are expected to support the fiscal health of states in the long term, according to a report by CRISIL Ratings.

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However, the rating agency noted that near-term challenges may persist due to limited incremental fiscal support from the Centre. The Finance Commission, mandated to recommend fiscal transfers between the Centre and states for fiscal years 2027-31, has retained the vertical devolution, the states' share in central taxes, at 41 per cent. It has also introduced a new criterion for distributing taxes among states based on their contribution to the national gross domestic product (GDP), aimed at encouraging states to focus on long-term growth-oriented capital outlays. The Commission has also discontinued revenue deficit (RD) grants recommended by previous finance commissions, a move expected to improve fiscal discipline among states.