Devolution for $10-trn decade

INDIA'S FISCAL FEDERALISM MUST EVOLVE FROM BEING A SYSTEM OF CORRECTION TO ONE OF CO-CREATION

- TV MOHANDAS PAI NISHA HOLLA

THE 16TH FINANCE Commission (FC) begins its work at a defining moment for India's federal compact.The economy now stands at roughly $4 trillion, with states accounting for over 55% of total public expenditure, up sharply from less than half a decade ago. India's fiscal structure has shifted-the Union remains the architect of macro strategy, but states are now the primary executors of growth.

The FC's role extends far beyond fiscal arithmetic. It must strike a constitutional balance between equity and efficiency, growth and justice, redistribution, and performance.With India targeting a $10-trillion GDP within the decade, the principles of devolution must evolve to serve the India of today.

The 15th FC's tenure coincided witha period of intense flux-pandemic shocks, global inflation,and strong tax buoyancy. Between FY2 1 and FY26(E), gross tax collections reached %193.8 lakh crore, exceeding projections by 26%, while devolutions to states rose to 62.8 lakh crore, around 24% higher than anticipated. This surge reflected a resilient recovery and broadertax base. Yet,evenas revenues have strengthened, the Union's share of public spending has fallen to about 45%, with states leading the charge on infrastructure, health, and welfare.

However, this redistribution of fiscal power has not been matched by a structural rethinking of how resources are shared. The 16th FC faces a dual challenge-to ensure fiscal federalism remains equitable and sustainable,and to designa formula that empowers states to drive competitiveness ina globalised economy.