'41% Illusion': Re-engineering India's Fiscal Federalism Amidst Shrinking Divisible Pool
The article analyzes the Sixteenth Finance Commission's (FC16) recommendations, noting that while the States' share in the divisible pool remains at 41%, this figure is misleading. The divisible pool as a proportion of gross tax revenues has shrunk significantly due to growing cesses and surcharges retained by the Union. FC16 discontinued various grants and deferred structural reforms like amending Fiscal Responsibility Legislation and controlling off-budget borrowings. A key change is replacing the 'tax and fiscal effort' criterion with 'contribution to GDP' in the horizontal devolution formula, benefiting high-GSDP states and disadvantaging states with greater fiscal need. This re-engineering, coupled with conditional local body grants, shifts power towards the Centre and impacts states with weaker governance.
Key Points
- The 41% States' share in the divisible pool is an 'illusion' as the divisible pool itself has shrunk relative to gross tax revenues due to increasing cesses and surcharges retained by the Union.
- The Sixteenth Finance Commission (FC16) discontinued revenue deficit, sector-specific, and State-specific grants, impacting targeted fiscal relief.
- FC16 deferred structural reforms such as amending Fiscal Responsibility Legislation and controlling off-budget borrowings.
- The horizontal devolution formula replaced 'tax and fiscal effort' with 'contribution to GDP' as a criterion, benefiting high-GSDP states and disadvantaging those with greater fiscal need.
- Conditional local body grants, tied to Central monitoring requirements, further shift power towards the Centre and affect states with weaker governance infrastructure.
Exam Facts
- The Sixteenth Finance Commission (FC16) recommended retaining States' share in the divisible pool at 41%.
- The divisible pool as a proportion of gross tax revenues (GTR) averaged 89.2% (FC13), fell to 82.1% (FC14), and further to 78.3% (FC15).
- The 'contribution to GDP' criterion, assigned a 10% weight, replaced the 'tax and fiscal effort' criterion (2.5% weight in FC15).
- The recommended amount for rural and urban local bodies is ₹7,91,493 crore.
- Combined general government debt is projected to fall from 77.3% of GDP (2026-27) to 73.1% (2030-31).
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