3 min readFeb 19, 2026 07:44 AM IST
First published on: Feb 19, 2026 at 07:42 AM IST
Numbers can reassure, but they can also distract. The editorial “Finance Commission strikes a new balance” (IE, February 3) invites readers to take comfort in the arithmetic of the 16th Finance Commission. Fiscal federalism, however, is not sustained by ratios alone. It rests on how power, responsibility, and risk are shared between the Union and the states. On that deeper measure, the sense of balance conveyed by the editorial appears less secure than suggested.
The centrepiece of the reassurance is the decision to retain states’ share in the divisible pool at 41 per cent. In isolation, this looks like continuity. But the significance of this number depends on the size of the pool to which it applies. Over the last decade, the Centre has increasingly turned to cesses and surcharges that lie outside the divisible pool and are, therefore, not shared with states. These levies have grown from a relatively small component of Union revenues to a substantial one. As a result, the effective share of states in total Union tax collections is materially lower than what the 41 per cent headline implies, even as states continue to shoulder the bulk of spending in welfare and infrastructure.
This erosion of the shared base matters more than the stability of the rate. States can plan, borrow, and reform when the rules governing their fiscal space are predictable. When the Centre’s revenue strategy steadily narrows what is shareable, continuity in the devolution ratio offers limited comfort. It also complicates the Commission’s emphasis on fiscal discipline at the state level, since tightening constraints operate within a shrinking pool of discretionary resources.
The editorial suggests that regional concerns, particularly those of southern states, have been addressed through a rise in their horizontal share from 15.8 per cent to 17 per cent. Set against a longer historical arc, this is a modest adjustment. The southern region’s share exceeded 21 per cent under the 11th FC and declined steadily over successive Commissions.
Equity and federal principles require that poorer and more populous states receive support. At the same time, fairness in a federation also has a temporal dimension. States that invested early in education, public health, and population stabilisation did so in line with national priorities and generated benefits that extended well beyond their borders. A framework that only marginally reflects such long-term effort risks appearing indifferent to outcomes that were once actively encouraged.
The introduction of a state’s contribution to GDP as a criterion is meant to acknowledge performance, but its design limits its impact. GSDP captures structural and historical factors, many of which lie beyond current policy choices. Its relatively small weight, combined with the dominance of population-related criteria, means that the recognition of contribution remains partial. The removal of tax effort as a criterion further weakens the link between revenue mobilisation and fiscal reward.
None of this diminishes the seriousness with which the 16th FC has approached its mandate. Nor does it deny the need for reform in state finances. The concern is narrower. By focusing on stability in headline ratios and modest shifts in shares, the editorial may overstate how far a new balance has been achieved.
The writer is a lawyer and public policy consultant
