New Delhi, Feb 3 (NationPress) The recommendations of the 16th Finance Commission (FC) signify a pivotal transition aimed at promoting economic efficiency, bolstering local governance, enhancing fiscal transparency, and ensuring debt sustainability, all while maintaining support for increased capital expenditure by states, according to a report released on Tuesday.

The 16th FC has upheld the vertical devolution of Union taxes to states at 41 percent of the divisible pool for the period FY2027–FY2031, mirroring the setup of the 15th Finance Commission, which guarantees continuity in fiscal transfers between the Centre and states, as reported by ICRA.

“Nonetheless, significant modifications in the horizontal devolution framework are anticipated to change the inter-state distribution of resources. The 16th FC has introduced a novel criterion, Contribution to GDP, weighted at 10 percent, replacing the previous tax and fiscal effort criterion,” the report stated.

In conjunction with a reduction of the area criterion's weight to 10 percent, these amendments are projected to favor states demonstrating better economic management.

As a result, the share of 14 out of 28 states in the divisible pool is expected to rise during FY2027–FY2031, with Karnataka identified as the largest beneficiary, followed by Kerala, Gujarat, Haryana, Punjab, Andhra Pradesh, Assam, and Maharashtra.

Regarding grants, the 16th FC has proposed an impressive increase in local body and disaster management grants to Rs. 9.5 trillion for its award period, marking a 72 percent increase over the 15th FC period.

Local body grants have been more than doubled to Rs. 7.9 trillion, with 60 percent being conditional but untied, thereby granting states greater flexibility, while the remaining 40 percent is linked to sanitation, solid waste, and water management.

Encouragingly, a high release ratio of grants during the prior FC period instills confidence in states’ capacity to fulfill the stipulated conditions.

“Simultaneously, the 16th FC has abolished revenue deficit grants, citing their ineffectiveness in resolving structural fiscal gaps. Consequently, 13 states that received such grants under the 15th FC are expected to see a reduction in their overall grants, despite higher inter-state shares for some,” the ICRA report noted.

In terms of fiscal discipline, the Commission has advised states to strictly adhere to a fiscal deficit ceiling of 3.0 percent of GSDP during FY2027–FY2031, without provisions for additional reform-linked borrowing or carry-forward of unused borrowing limits.

“This represents a shift from the flexibility previously permitted by the last two Finance Commissions and may require a reevaluation of state spending priorities. The Commission has also explicitly advised that states completely cease off-budget borrowings and incorporate all such liabilities into their budgets, backed by enhanced disclosures and audit oversight,” the report emphasized.