The world is experiencing significant geopolitical changes, which would lead to economic hardships for many countries, including India. In this volatile situation, the challenges before the Sixteenth Finance Commission (FC16) are considerable. The primary agenda before the FC16 is to address the North-South debate in India over inequity in allocating Central funds to the states. Along with that, rising cess and surcharges is another important issue. In finding a solution to all these, we need to look at which states have been gaining and which are losing their share over time; and what can be done to reverse this trend.
Presently, the FC16 will make its recommendations by October 31, 2025, covering a period of five years commencing from April 1, 2026. This time, while forecasting the revenues and expenditures, the challenge before FC16 will be to assess the impact of global economic uncertainty due to ongoing wars, Covid-19-related fiscal shocks, etc. Under Article 280 of the Constitution, the FCs recommend transferring resources from the Centre to the states to address vertical and horizontal fiscal imbalances. Gradually, successive FCs have made increments in the devolution ratio and have successfully enhanced the size of the divisible pool and the share of states therein.
The Central government has greater revenue-raising scopes, because of their nationwide tax collection base while the development responsibilities lie on the states. The Union government collects 60-68% of combined revenue receipts whereas the revenue expenditure of the state ranges between 50-60%. Additionally, prudent fiscal management is expected from states but they are financially hamstrung because of limited fiscal space to meet their committed liabilities.
Every FC has aimed to bridge this gap through vertical and horizontal approaches. For vertical equity, the FC recommends transfers under two heads: (i) tax devolutions as a percentage of sharable tax revenue, and (ii) specific purpose grants. For horizontal devolution across states, altogether twelve criteria have been adopted by different FCs. The FC, while deciding horizontal criteria, looks into several issues for the balanced development of all states. Hence, this article proposes a few criteria for consideration by FC16 to have an equitable regional development:
- Women's work participation: The development journey of India is closely intertwined with the empowerment of women. The initiatives like women-led development under the G20 Presidency, and the celebration of ‘Nari Shakti’ during Amritkaal show a comprehensive approach to women’s participation in the workforce. While considering the Labour Force Participation Rate (LFPR) of women (15-59 years) as per PLFS data, it is seen that in 2022-23, it varied across the states from 23 to 24% in Bihar and Haryana to 76.6% in Himachal Pradesh. While considering urban LFPR for females, it is lowest in Bihar (13.8%) and highest in Nagaland (51.7%). Thus, FC16 can consider women's work participation as one of the criteria for inter-se transfer to states and can incentivise those states that have promoted women's work participation.
- Multidimensional poverty: NITI Aayog’s Multidimensional Poverty Index (MPI) report provides a comprehensive analysis of poverty trends across states based on the dimensions of health, education and standard of living. It provides insights into “how many are poor” and “how poor are the poor”. There is a decline in multidimensionally poor persons from 24.85% to 14.96% between 2015-16 and 2019-21. In absolute numbers, about 135.5 million persons have escaped poverty during the period. Similarly, the intensity of poverty also reduced from 47.14% to 44.39%. This is a great achievement but to further reduce this figure, the performance of states has to be assessed. Still, with a 0.55% poverty rate in 2019-21, Kerala has the lowest number of multidimensional poor persons in the country, whereas, at 33.76%, Bihar has the highest. It is also notable that Uttar Pradesh, Bihar and Madhya Pradesh recorded the sharpest decline in the number of multidimensionally poor persons. Therefore, to reduce inequality among states, FC16 should financially support states that have excelled in poverty reduction.
- Aspirational districts: India has been on a high growth trajectory, but there is no guarantee that the growth will be shared by all. Hence, ensuring that the fruit of rapid economic development is equitably shared emerges as a key challenge. To ensure this, NITI Aayog launched the Aspirational Districts Programme in the 112 most under-developed districts across states in 2018. The highest number of aspirational districts is in Jharkhand (19), which is followed by Bihar (13), while the lowest number is in Kerala (1). Similarly, the Aspirational Blocks Programme was launched by NITI Aayog in January 2023 in 500 blocks across the country. The highest number of blocks (68) are in UP, followed by Bihar (61). Thus, FC16 can consider the states with a high number of aspirational districts and blocks as one of its criteria for horizontal transfer of funds to states in place of sector-specific transfer.
- Emission of plastic waste: Excessive use and negligence of plastic waste have resulted in a massive pollution load on the environment. Consequently, plastic has entered the food chain leading to serious health issues. Plastic waste generation continues to escalate, from 1,568,714 in 2016-17 to 4,126,997 tonnes per annum in 2020-21. To reduce this menace, plastic waste can be recycled or used in road making, refuse-derived fuel, etc. It is suggested to FC16 to introduce the criterion of capping the generation of plastic waste. Also, activities like recycling and reuse should be encouraged.
- Growing geriatric population: The increasing longevity and falling fertility have led to an increase in the population of adults above 60 years. This translates into wide-ranging health, social, and economic challenges, both currently and in the future. The ageing population will require increased resources and new demands. For example, in Kerala, the proportion of senior citizens is expected to increase from 13% in 2011 to 23% in 2036, while in Uttar Pradesh it will increase to 12%. Like Kerala, other states such as Andhra Pradesh, Tamil Nadu, Karnataka, and West Bengal are expected to have a huge proportion of the ageing population by 2036. Fulfilling needs and social protection for senior citizens will put a huge burden on the exchequer of these states. Thus, this can be another area of consideration to mitigate horizontal inequities among states.
Every FC has aimed to bridge this gap through vertical and horizontal approaches. For vertical equity, the FC recommends transfers under two heads: (i) tax devolutions as a percentage of sharable tax revenue, and (ii) specific purpose grants. For horizontal devolution across states, altogether twelve criteria have been adopted by different FCs. The FC, while deciding horizontal criteria, looks into several issues for the balanced development of all states. Hence, this article proposes a few criteria for consideration by FC16 to have an equitable regional development:
- Women's work participation: The development journey of India is closely intertwined with the empowerment of women. The initiatives like women-led development under the G20 Presidency, and the celebration of ‘Nari Shakti’ during Amritkaal show a comprehensive approach to women’s participation in the workforce. While considering the Labour Force Participation Rate (LFPR) of women (15-59 years) as per PLFS data, it is seen that in 2022-23, it varied across the states from 23 to 24% in Bihar and Haryana to 76.6% in Himachal Pradesh. While considering urban LFPR for females, it is lowest in Bihar (13.8%) and highest in Nagaland (51.7%). Thus, FC16 can consider women's work participation as one of the criteria for inter-se transfer to states and can incentivise those states that have promoted women's work participation.
- Multidimensional poverty: NITI Aayog’s Multidimensional Poverty Index (MPI) report provides a comprehensive analysis of poverty trends across states based on the dimensions of health, education and standard of living. It provides insights into “how many are poor” and “how poor are the poor”. There is a decline in multidimensionally poor persons from 24.85% to 14.96% between 2015-16 and 2019-21. In absolute numbers, about 135.5 million persons have escaped poverty during the period. Similarly, the intensity of poverty also reduced from 47.14% to 44.39%. This is a great achievement but to further reduce this figure, the performance of states has to be assessed. Still, with a 0.55% poverty rate in 2019-21, Kerala has the lowest number of multidimensional poor persons in the country, whereas, at 33.76%, Bihar has the highest. It is also notable that Uttar Pradesh, Bihar and Madhya Pradesh recorded the sharpest decline in the number of multidimensionally poor persons. Therefore, to reduce inequality among states, FC16 should financially support states that have excelled in poverty reduction.
- Aspirational districts: India has been on a high growth trajectory, but there is no guarantee that the growth will be shared by all. Hence, ensuring that the fruit of rapid economic development is equitably shared emerges as a key challenge. To ensure this, NITI Aayog launched the Aspirational Districts Programme in the 112 most under-developed districts across states in 2018. The highest number of aspirational districts is in Jharkhand (19), which is followed by Bihar (13), while the lowest number is in Kerala (1). Similarly, the Aspirational Blocks Programme was launched by NITI Aayog in January 2023 in 500 blocks across the country. The highest number of blocks (68) are in UP, followed by Bihar (61). Thus, FC16 can consider the states with a high number of aspirational districts and blocks as one of its criteria for horizontal transfer of funds to states in place of sector-specific transfer.
- Emission of plastic waste: Excessive use and negligence of plastic waste have resulted in a massive pollution load on the environment. Consequently, plastic has entered the food chain leading to serious health issues. Plastic waste generation continues to escalate, from 1,568,714 in 2016-17 to 4,126,997 tonnes per annum in 2020-21. To reduce this menace, plastic waste can be recycled or used in road making, refuse-derived fuel, etc. It is suggested to FC16 to introduce the criterion of capping the generation of plastic waste. Also, activities like recycling and reuse should be encouraged.
- Growing geriatric population: The increasing longevity and falling fertility have led to an increase in the population of adults above 60 years. This translates into wide-ranging health, social, and economic challenges, both currently and in the future. The ageing population will require increased resources and new demands. For example, in Kerala, the proportion of senior citizens is expected to increase from 13% in 2011 to 23% in 2036, while in Uttar Pradesh it will increase to 12%. Like Kerala, other states such as Andhra Pradesh, Tamil Nadu, Karnataka, and West Bengal are expected to have a huge proportion of the ageing population by 2036. Fulfilling needs and social protection for senior citizens will put a huge burden on the exchequer of these states. Thus, this can be another area of consideration to mitigate horizontal inequities among states.
Every FC had new challenges to address and each commission has done their work meticulously. Designing proper and balanced recommendations in such a stressed fiscal situation is a tough task. Moreover, incentivising the states for prudent fiscal behaviour would be the foremost challenge. FC16’s recommendations are even more crucial because the award period matches with the final phase of SDG 2030, which will lay a foundation for Viksit Bharat@2047.
Dr Barna Ganguli is a faculty member at the Bihar Institute of Public Finance and Policy, and Manoj Narayan is a development professional. The views expressed are personal