{"id":1080,"date":"2026-04-07T07:07:36","date_gmt":"2026-04-07T07:07:36","guid":{"rendered":"https:\/\/materials.simplycurrentaffairs.com\/?p=1080"},"modified":"2026-04-09T07:07:46","modified_gmt":"2026-04-09T07:07:46","slug":"sixteenth-finance-commission","status":"publish","type":"post","link":"https:\/\/materials.simplycurrentaffairs.com\/index.php\/2026\/04\/07\/sixteenth-finance-commission\/","title":{"rendered":"Sixteenth Finance Commission"},"content":{"rendered":"\n

Sixteenth Finance Commission<\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/mark><\/strong><\/h2>\n\n\n\n

Finance Commission<\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/mark><\/strong><\/h3>\n\n\n\n
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  • The Finance Commission is a constitutional body<\/strong> set up under Article 280<\/strong> of the Constitution.  <\/li>\n\n\n\n
  • Under Article 280, the President of India <\/strong>is required to constitute a Finance Commission at an interval of five years or earlier.<\/strong><\/li>\n<\/ul>\n\n\n\n
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    Did you know?<\/strong> <\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/h4>\n\n\n\n
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    • The\u00a0First Finance Commission<\/strong>\u00a0was constituted in\u00a01952<\/strong>\u00a0under the\u00a0chairmanship\u00a0of\u00a0K.C.\u00a0Neogy<\/strong>.<\/li>\n<\/ul>\n<\/div><\/div>\n\n\n\n

      Qualifications:<\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/h4>\n\n\n\n
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      • The Finance Commission consists of\u00a0a\u00a0chairman\u00a0and four members<\/strong>\u00a0appointed by the\u00a0President<\/strong>.\u00a0<\/li>\n\n\n\n
      • As per the\u00a0Finance Commission [Miscellaneous Provisions] Act, 1951<\/strong>\u00a0and\u00a0The Finance Commission (Salaries & Allowances) Rules, 1951,\u00a0<\/strong>the\u00a0Chairman\u00a0<\/strong>of the Commission is selected from among persons who have had\u00a0experience in<\/strong>\u00a0public affairs<\/strong>, and the\u00a0four other members<\/strong>\u00a0are selected from among persons who:\u00a0\n
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        • are, or have been, or are qualified to be appointed as\u00a0Judges of a High Court<\/strong>; or\u00a0<\/li>\n\n\n\n
        • have\u00a0special knowledge of the finances and accounts of Government<\/strong>; or\u00a0<\/li>\n\n\n\n
        • have had\u00a0wide experience in financial matters and in administration<\/strong>; or\u00a0<\/li>\n\n\n\n
        • have\u00a0special knowledge of economics.<\/strong><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n\n\n\n

          Functions:<\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/h4>\n\n\n\n
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          • The Finance Commission shall make recommendations to the President as to the following matters:\u00a0\n
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            • the\u00a0distribution of tax proceeds\u00a0<\/strong>between the Union and the States and the share of each state.\u00a0<\/mark><\/li>\n\n\n\n
            • the\u00a0principles which should govern the grants-in-aid\u00a0<\/strong>of the revenues of the States out of the Consolidated Fund of India;\u00a0<\/mark><\/li>\n\n\n\n
            • the\u00a0measures needed to augment the Consolidated Fund of a State\u00a0<\/strong>to supplement the resources of the\u00a0Panchayats<\/strong>\u00a0in the State\u00a0on the basis of\u00a0the recommendations made by the Finance Commission of the State;\u00a0<\/li>\n\n\n\n
            • the\u00a0measures needed to augment the Consolidated Fund of a State\u00a0<\/strong>to supplement the resources of the\u00a0Municipalities<\/strong>\u00a0in the State\u00a0on the basis of\u00a0the recommendations made by the Finance Commission of the State;\u00a0<\/li>\n\n\n\n
            • any other matter referred to the Commission by the\u00a0President\u00a0<\/strong>in the interests of sound finance.<\/mark><\/li>\n<\/ul>\n<\/li>\n\n\n\n
            • The recommendations made by the Finance Commission are\u00a0advisory in nature<\/strong>\u00a0and\u00a0not binding on the government.\u00a0<\/strong>\u00a0<\/li>\n<\/ul>\n\n\n\n

              Why in\u00a0News?<\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/mark><\/strong><\/h3>\n\n\n\n
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              • Finance Minister Nirmala Sitharaman laid the\u00a016th Finance Commission report\u00a0<\/strong>for the period 2026-2031 in the Lok Sabha.\u00a0\u00a0\n
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                • The 16th Finance Commission was constituted by the President in 2023 under the\u00a0chairmanship\u00a0of\u00a0Dr. Arvind Panagariya,<\/strong>\u00a0former Vice-\u00a0chairman\u00a0of NITI Aayog.\u00a0\u00a0\u00a0<\/li>\n\n\n\n
                • The Commission was mandated to make its recommendations for the\u00a0five\u2011year period\u00a0commencing\u00a0on 1 April 2026 and ending on 31 March 2031.<\/strong><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n\n\n\n

                  Key Recommendations<\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/strong><\/mark><\/strong><\/h3>\n\n\n\n

                  Vertical & Horizontal Devolution:<\/strong><\/h4>\n\n\n\n
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                  • The 16th FC has recommended that the\u00a0Central Government\u00a0retain\u00a0the 41% share of tax devolution to the States<\/strong>\u00a0(vertical devolution) that had been implemented since 2021.\u00a0<\/li>\n\n\n\n
                  • The\u00a0change in the states\u2019 share<\/strong>\u00a0(horizontal devolution) is due to a\u00a0change in formula<\/strong>\u00a0adopted by the 16th FC, based on\u00a0six criteria<\/strong>, including some new ones:\u00a0\u00a0\n
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                    1. Per capita Gross State Domestic Product (GSDP) distance<\/strong>\u00a0(42.5 per cent weight),\u00a0\u00a0<\/li>\n\n\n\n
                    2. Population<\/strong>\u00a0(17.5 per cent),\u00a0\u00a0<\/li>\n\n\n\n
                    3. Demographic performance<\/mark><\/strong>\u00a0(10 per cent),\u00a0\u00a0<\/li>\n\n\n\n
                    4. Area<\/strong>\u00a0(10 per cent),\u00a0\u00a0<\/li>\n\n\n\n
                    5. Forest<\/strong>\u00a0(10 per cent), and<\/mark>\u00a0\u00a0<\/li>\n\n\n\n
                    6. Contributions to GDP\u00a0<\/strong>(10 per cent).<\/li>\n<\/ol>\n<\/li>\n<\/ul>\n\n\n\n
                      \"\"<\/figure>\n\n\n\n
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                      • Per Capita GSDP Distance (Income Distance):<\/span>\u00a0<\/strong>It is the\u00a0difference between the per capita GSDP of a state<\/strong>\u00a0and the\u00a0average of the per capita GSDP of the top three large states\u00a0<\/strong>with the highest per capita GSDP.\u00a0States with a lower per capita GSDP<\/strong>\u00a0will receive a\u00a0higher share\u00a0<\/strong>on this parameter, to\u00a0maintain\u00a0equity among states.\u00a0<\/li>\n\n\n\n
                      • Population:<\/span>\u00a0<\/strong>On this parameter, the share in devolution is\u00a0determined\u00a0based on the\u00a0share in the population as per the 2011 Census.<\/strong>\u00a0<\/li>\n\n\n\n
                      • Demographic Performance:<\/span><\/strong>\u00a0The\u00a015th FC\u00a0<\/strong>had\u00a0introduced<\/strong>\u00a0this parameter to\u00a0award states for controlling population.\u00a0<\/strong>The\u00a016th FC has redefined this<\/strong>\u00a0to account for\u00a0population growth between 1971 and 2011<\/strong>.\u00a0States with lower population growth\u00a0<\/strong>will have a\u00a0higher share<\/strong>\u00a0under this parameter.\u00a0<\/li>\n\n\n\n
                      • Forest:<\/span>\u00a0<\/strong>The 16th FC has assigned\u00a0weightage to both the share of a state in the overall forest area<\/strong>, and its\u00a0share in the increase in overall forest area between 2015 and 2023.<\/strong>\u00a0Further, it has also considered\u00a0open forests<\/strong>\u00a0in arriving at the total forest area. In contrast, the 15th FC had considered only dense and moderately dense\u00a0forests, and\u00a0defined the parameter only in terms of share in the overall forest area.\u00a0<\/li>\n\n\n\n
                      • Contribution to GDP:<\/span><\/strong>\u00a0The\u00a016th FC has introduced\u00a0<\/strong>this parameter to account for the\u00a0contribution to national GDP<\/strong>. This\u00a0replaces the tax and fiscal efforts parameter<\/strong>\u00a0used by the 15th FC which rewarded states with a higher tax collection efficiency.<\/li>\n<\/ul>\n<\/div><\/div>\n\n\n\n

                        Grants-in-Aid:<\/strong><\/strong><\/h4>\n\n\n\n
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                        • In a major departure from earlier Finance Commissions, the panel has recommended\u00a0no revenue deficit grants (RDGs),<\/strong>\u00a0arguing that states have significant scope to increase revenues and\u00a0rationalise\u00a0expenditure.\u00a0\n
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                          • RDGs were designed to fill the gap between what a state earns and what it must spend to run essential public services.<\/em>\u00a0<\/li>\n<\/ul>\n<\/li>\n\n\n\n
                          • In addition, the Commission\u00a0does not recommend any sector-specific or State-specific grants<\/strong>\u00a0but has earmarked\u00a0Rs. 7.91 trillion for rural and urban local bodies\u00a0<\/strong>over 2026-31, with a\u00a060:40 rural-urban split<\/strong>, and a strong emphasis on water, sanitation, and urban infrastructure.\u00a0\u00a0\n
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                            • Special Infrastructure Grants<\/strong>\u00a0(tied to the development of a comprehensive wastewater management system in cities) and\u00a0Urbanisation\u00a0Premium Grants<\/strong>\u00a0(one-time grant for merger of peri-urban villages into adjoining urban local body areas and formulation of a Rural to Urban Transition Policy) have also been recommended for\u00a0urban local bodies.\u00a0<\/strong>\u00a0<\/li>\n<\/ul>\n<\/li>\n\n\n\n
                            • It also recommended\u00a0Rs. 2.04 trillion for State disaster response and mitigation funds<\/strong>\u00a0plus about\u00a0Rs. 79,000\u00a0crore\u00a0for national funds<\/strong>,\u00a0allocated\u00a0using a\u00a0revamped disaster risk index.<\/strong><\/li>\n<\/ul>\n\n\n\n

                              Other Recommendations:<\/strong><\/strong><\/strong><\/h4>\n\n\n\n
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                              • The Commission has also recommended\u00a0capping states\u2019 fiscal deficits at 3 per cent of GSDP<\/strong>\u00a0(excluding loans under SASCI) and\u00a0lowering the Union government\u2019s fiscal deficit to 3.5 per cent of GDP by 2030-31.<\/strong>\u00a0<\/li>\n\n\n\n
                              • Under the Scheme for Special Assistance to States for Capital Investment (SASCI), the Centre provides 50\u2011year interest\u2011free loans to states exclusively for capital expenditure.<\/em>\u00a0<\/li>\n\n\n\n
                              • It has also called for the\u00a0complete discontinuation of off-budget borrowings by states,\u00a0<\/strong>with all such liabilities brought onto budget, and for\u00a0state fiscal responsibility laws to be amended<\/strong>\u00a0to ensure uniformity and alignment with the Commission\u2019s consolidation roadmap.\u00a0<\/li>\n\n\n\n
                              • Off-budget borrowing refers to a government’s practice of raising funds for various purposes without reflecting these expenditures in the official budget.<\/em>\u00a0<\/li>\n\n\n\n
                              • Considering the concerns over\u00a0\u201cfiscal populism\u201d,<\/strong>\u00a0the Commission has recommended the\u00a0rationalisation\u00a0of subsidy schemes<\/strong>\u00a0and the\u00a0introduction of \u201csunset clauses\u201d\u00a0<\/strong>for schemes that give subsidies on non-merit private goods and unconditional transfers.\u00a0\u00a0<\/li>\n\n\n\n
                              • A sunset clause is a provision that\u00a0sets\u00a0a mandatory expiry date for a program, forcing its evaluation and renewal to continue.<\/em>\u00a0<\/li>\n\n\n\n
                              • The Commission recommended a\u00a0review and closure of 308 inactive State Public Sector Enterprises (SPSEs).\u00a0<\/strong>\u00a0<\/li>\n\n\n\n
                              • The Commission has also recommended\u00a0privatising\u00a0the country\u2019s power distribution sector\u00a0<\/strong>as a crucial step to\u00a0modernise\u00a0it and address its long-standing financial stress.<\/li>\n<\/ul>\n","protected":false},"excerpt":{"rendered":"

                                Sixteenth Finance Commission Finance Commission Did you know?  Qualifications: Functions: Why in\u00a0News? Key Recommendations Vertical & Horizontal Devolution: Grants-in-Aid: Other Recommendations:<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[11],"tags":[],"class_list":["post-1080","post","type-post","status-publish","format-standard","hentry","category-polity"],"_links":{"self":[{"href":"https:\/\/materials.simplycurrentaffairs.com\/index.php\/wp-json\/wp\/v2\/posts\/1080","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/materials.simplycurrentaffairs.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/materials.simplycurrentaffairs.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/materials.simplycurrentaffairs.com\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/materials.simplycurrentaffairs.com\/index.php\/wp-json\/wp\/v2\/comments?post=1080"}],"version-history":[{"count":2,"href":"https:\/\/materials.simplycurrentaffairs.com\/index.php\/wp-json\/wp\/v2\/posts\/1080\/revisions"}],"predecessor-version":[{"id":1083,"href":"https:\/\/materials.simplycurrentaffairs.com\/index.php\/wp-json\/wp\/v2\/posts\/1080\/revisions\/1083"}],"wp:attachment":[{"href":"https:\/\/materials.simplycurrentaffairs.com\/index.php\/wp-json\/wp\/v2\/media?parent=1080"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/materials.simplycurrentaffairs.com\/index.php\/wp-json\/wp\/v2\/categories?post=1080"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/materials.simplycurrentaffairs.com\/index.php\/wp-json\/wp\/v2\/tags?post=1080"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}