Finance panel rewards contribution to GDP

THE SIXTEENTH FINANCE Commission (16th FC) has sought to balance continuity with reform in India’s fiscal federal architecture by retaining states’ share at 41% of the divisible pool of central taxes, ensuring predictability in intergovernmental transfers over its five-year award period from FY27 to FY31.

- PRASANTA SAHU

The report has been accepted by the government.

The real innovation of the 16th FC, however, lies in its horizontal devolution formula. Under its Chairman Arvind Panagariya, the commission has attempted to blend equity with efficiency by introducing “contribution to GDP” as a new criterion, assigning it a calibrated weight of 10% to avoid sharp redistribution shocks.

"This is a new criterion we are introducing in recognition of India’s growth ambition," the commission said.

A comparison with the Fifteenth Finance Commission (15th FC) underscores the shift.

The earlier formula was heavily need-based: income distance carried the highest weight at 45%, followed by population (2011) at 15%, area at 15%, forest and ecology at 10%, and demographic performance at 12.5%.

Efficiency featured only marginally, through tax effort at 2.5%.

The 16th FC has retained income distance as the dominant factor, but trimmed its weight to 42.5%.