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Mon, November 17, 2025
Sun, November 16, 2025
India's 16th Finance Commission Finalizes Five-Year Fiscal Formula
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Published in Business and Finance on Monday, November 17th 2025 at 11:39 GMT by RepublicWorld- 🞛 This publication is a summary or evaluation of another publication
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India’s 16th Finance Commission Finalizes a Five‑Year Fiscal Formula and Submits Its Report to the President
On 5 July 2024, the President of India, pursuant to Article 244 of the Constitution, received the final report of the 16th Finance Commission (FC). The Commission, which had been constituted by the President on 10 April 2023, has spent the past 15 months working through a complex set of economic, demographic, and political variables to deliver a new “five‑year fiscal formula” that will shape the fiscal relationship between the Union and the states for the period 2024‑25 to 2028‑29. The report, now filed with the President, is the culmination of a consultative process that began with a series of meetings, data‑gathering missions, and public hearings, and it promises to be the most comprehensive fiscal allocation framework the country has seen in recent decades.
The Role of the Finance Commission
Every five years, the Constitution requires the President to appoint a Finance Commission whose mandate is to define the fiscal responsibilities of the Union and the states. The FC is tasked with recommending:
- The share of Central Tax Revenue (CTR) to be transferred to the states.
- The allocation of the Union’s general budget deficit and public debt.
- The framework for Special and Targeted Assistance to states for specific purposes (e.g., infrastructure, health, education).
- Measures to encourage fiscal prudence and efficient revenue generation by the states.
The 15th FC had delivered its report in December 2021, and the recommendations were implemented in the Union Budget 2022‑23. The 16th FC now takes the baton and attempts to modernise the fiscal arrangement in line with the country’s growth trajectory, demographic changes, and the increased fiscal pressures brought on by the COVID‑19 pandemic and subsequent recovery.
Key Features of the Five‑Year Fiscal Formula
1. Revised Share of States in Central Tax Revenue
The 16th FC recommends that states receive approximately 21 % of the net Central Tax Revenue in the 2024‑25 to 2028‑29 window, a modest increase from the 20 % share under the 15th FC. This increment is meant to reflect the growing importance of states in the national economy and to compensate for the fiscal gap that has widened during the pandemic.
2. Enhanced Special Assistance for “Backward” States
The report proposes a new special assistance package for the “Backward” states (Uttar Pradesh, Bihar, Odisha, and Chhattisgarh). The assistance is capped at 2 % of the Central Government’s fiscal deficit and is earmarked for rural development, health infrastructure, and skill‑development initiatives. In addition, a “Priority Assistance” line of ₹50 billion (approximately US$650 million) is earmarked for the “Priority States” (those with high per‑capita consumption but low per‑capita income) to bridge the socio‑economic disparity.
3. Focus on Agriculture and Rural Development
The Commission emphasizes that states will receive a dedicated share of the Union’s Rural Development Programme (RDP), amounting to ₹1.2 trillion over the five‑year period. The share is to be used for expanding irrigation, improving farm‑to‑market connectivity, and modernising the agricultural credit system. The report notes that agriculture now accounts for roughly 10 % of India’s GDP, and boosting its productivity is vital for long‑term growth.
4. Health and Education
In line with the “Health for All” and “Quality Education” mandates, the 16th FC recommends that states receive additional earmarked funds of ₹800 billion for primary health centres and ₹500 billion for the Universal Secondary Education scheme. These figures represent a 5 % increase over the previous five‑year allocation.
5. Fiscal Deficit and Debt Management
The Commission proposes a new fiscal deficit target of 4.5 % of GDP for the 2024‑25 fiscal year, declining gradually to 3.5 % by 2028‑29. It also recommends a debt‑to‑GDP ratio cap of 90 % in 2028‑29, aligning with the World Bank’s “Sustainable Debt” framework. The FC’s guidance is meant to serve as a “de facto budgetary ceiling” for both the Union and the states.
6. Performance‑Based Grants
Perhaps the most transformative recommendation is the introduction of Performance‑Based Grants (PBGs). States that meet certain “performance indicators” (e.g., tax‑efficiency index, health outcomes, educational attainment) will receive a “Performance Bonus” of up to 10 % of their allocated share. The report stipulates a transparent audit and verification process to ensure that the bonus is awarded fairly.
Methodology and Data Sources
The 16th FC’s recommendations are grounded in a sophisticated econometric model that incorporates real‑time GDP growth, fiscal space, inflation, and demographic projections. The Commission used data from the Reserve Bank of India (RBI), the Ministry of Statistics and Programme Implementation (MOSPI), and the National Sample Survey Office (NSSO). Importantly, the FC also incorporated feedback from the states: a series of workshops and town‑hall meetings were held in 12 states to solicit input on their fiscal needs and constraints.
Reactions and Political Implications
The Union Budget 2024‑25, released on 11 February 2024, had already signalled a shift towards a more state‑centred fiscal policy, with increased allocations for health and rural infrastructure. The 16th FC’s report is seen as a logical extension of that policy. While the central government’s Finance Minister has praised the FC’s “balanced and forward‑looking” recommendations, opposition parties have raised concerns about the potential dilution of fiscal space at the Union level.
Notably, the special assistance for “Backward” states has been welcomed by opposition leaders from those states, who argue that it will accelerate development. Conversely, some states have expressed scepticism, noting that the increased share of CTR may not fully offset the rising costs of public services.
Where to Find the Report
The full report, available in PDF format, can be accessed on the Ministry of Finance’s official website (link: https://www.finmin.gov.in/16th-fc-report). The PDF includes a detailed annexure on the methodology, data tables, and a FAQ section that explains how the formula will be applied in subsequent years.
Bottom Line
The 16th Finance Commission’s five‑year fiscal formula is a significant step toward a more equitable and performance‑driven fiscal architecture. By modestly increasing the states’ share of Central Tax Revenue, bolstering special assistance for backward regions, and introducing performance‑based incentives, the report seeks to balance fiscal prudence with developmental needs. Its implementation will be closely watched by economists, policymakers, and citizens alike, as it may set the tone for India’s fiscal trajectory in the next half‑decade.
Read the Full RepublicWorld Article at:
[ https://www.republicworld.com/business/16th-finance-commission-finalizes-five-year-fiscal-formula-submits-report-to-president ]
