What to expect from the 16th Finance Commission of India?

The Finance Commission now has the job of submitting its report, which would cover five years of governance.
16th Finance Commission of India
16th Finance Commission of India

On December 31, 2023, the Central government released the notification about constituting the 16th Finance Commission of India with Dr Arvind Panagariya, former Vice-Chairman of NITI Aayog and Professor of Columbia University as the chairman. Ritvik Ranjanam Pandey was named as the secretary to the commission. The rest of the members are yet to be announced.

The Finance Commission now has the job of submitting its report, which would cover five years of governance. The 16th FC shall make its report available by October 31 2025 covering five years commencing on April 1 2026. The terms of reference (ToR) submitted by the Central Cabinet at the formation of the commission provide an outline of the areas that the commission should focus on in its report.

The primary objective of the commission is to determine the distribution model of the financial resources (revenue from taxes) between the Central and the State governments and the allocation of the said proceeds among the States equitably.

As per the ToR, it would also have to formulate the principles by which the grants-in-aid will be distributed among the States from a consolidated fund created by the States for this purpose. The constitution of the fund should also augment the financial needs of panchayats and municipalities.

The commission was also tasked to review the present arrangements for financing disaster management initiatives, with the funds constituted under the Disaster Management Act, 2005.

What can we expect?

The Finance Commission (FC) normally takes about two years to make their recommendations. The recommendations of the 15th Finance Commission are valid up to the financial year 2025-26. As per Article 280 of the Constitution, the Finance Commission is to be constituted every fifth year or earlier, a rule that was amended at times i.e. as the recommendations of the 15th FC covered six years up to March 31, 2026, due to the pandemic.

The ToR for the 15th FC was extended to include a report on the impact of GST (goods and services tax), rewarding States based on performance on various indices and the division of expenditure on welfare schemes between the States and the Union. Later, the Union Cabinet also asked the FC to look into a possible contribution from the States towards defence preparedness for the country.

The ToR prepared for the 16th FC is brief compared to the ones formulated for the 15th FC. As finance secretary TV Somanathan put it, the ToR for the 16th FC are short but ‘all-encompassing.’

This could have been done under the light of tensions between the States and the Union in the backdrop of State Assembly Elections and Lok Sabha Elections in 2024; the mandate has been kept to a minimum. Promises of implementation of social welfare schemes by political parties during the election year might influence the allocation of States’ budgets. 

Another aspect that needs to be taken care of is the Covid-induced financial slowdown of States and the Union and measures to re-supply State coffers depleted due to the diversion of funds to healthcare during the pandemic and the subsequent lockdown. This might come under the clause for the allocation of funds for financing disaster management initiatives.

It is yet to be seen if the 16th FC will modify the percentage of the share of States from the pool of tax revenue; the share was set at 41 per cent as per the recommendations of the 15th FC and 42 per cent by the 14th Finance Commission.

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