Balancing on 41%: Why the 16th Finance Commission refused to budge on devolution

Subscribe to enjoy similar stories. In India’s federal set up, devolution of funds ensures proper transfer of resources, from the central government to the states, and further down to local bodies. Article 280 of the Indian constitution mandates that the President of India appoint a Finance Commission every five years to make recommendations on how to divide the net tax proceeds of the Union (divisible pool) with the states.

The commission recommends both vertical devolution (what states as a whole get from Centre) and horizontal devolution (how states’ share is distributed among each state). It also, among other things, allocates grants and resources for local governments. The 16th Finance Commission, headed by economist Arvind Panagariya, recently submitted its report, now tabled in the Parliament.

The report comes at a time when relationships between the Centre and many states are frayed over how devolution is done. Progressive states, especially in the south of the country, feel punished for pursuing development and reducing population. They are also upset that the Centre is depriving them of legitimate revenue by imposing cess and surcharges which are not shared with them.

Fiscal federalism, they argue, has collapsed. The Centre has refuted such claims. Mint looks at the recommendations of the 16th Finance Commission and whether it has addressed the concerns the states have.

The first Finance Commission was set up in 1951 and was mandated to recommend devolution for the period 1952 to 1957. It recommended that 16% of the gross tax revenue (GTR) be shared with the states. It further allocated 4.5% of GTR as grants, taking the total transfer from Centre to states to 20.5%.