A Finance Commission idea that'll serve us well

The 16th FC report makes a small but significant change in the principles governing how states should share India's common tax pool. It will incentivize better fiscal management

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The 16th Finance Commission (FC) must be commended for breaking the mould of earlier FCs in what is perhaps the most contentious area of fiscal federalism: 'horizontal devolution' or how each state's share of India's divisible pool of taxes is worked out.

The 16th FC's report covers four broad areas-namely, revenue-deficit grants, local-body grants, disaster-management funds and public finances-apart from the two main aspects of horizontal and vertical devolution; the latter refers to the binary split-up of taxes between the Union and states taken together. The report poses five questions. One, how should the share of states be allocated among 28 states over the award period of 2026-27 to 2030-31? Two, what principles should govern grants-in-aid to top up state revenues and how much should be given? Three, how to supplement the resources of states for third-tier governance? Four, what should be done to finance disaster-relief initiatives? And five, how can public finances be put on a sound footing?