The Sixteenth Finance Commission recommended that the states’ share in the divisible pool be maintained at 41 percent, but recommended several significant changes that could impact the allocation of funds allocated to them. The Finance Commission report was tabled in Parliament on Sunday by Finance Minister Nirmala Sitharaman after presenting the Union Budget 2026-27 along with a report on measures taken.
To determine the inter se share of states, the Sixteenth Finance Commission included a new parameter of state contribution to gross domestic product (GDP) in the horizontal decentralization criteria.
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“…with the growing ambition of the country in the background, we must recognize the effectiveness and in particular the contribution of States to growth. Consequently, for the first time, this Commission has decided to add the contribution of the State to GDP among its criteria for horizontal decentralization”, she indicates in her report. Aware of the principle of progressiveness, the Commission decided that the weight attributed to the criterion should be such that it only reflects a change of direction without causing a drastic change in the States’ shares. Thus, a weighting of 10% of the total of 100 was given to this criterion.
In total, it relied on population based on the 2011 census (weighting 17.5%), demographic performance (10%), area (10%), forest (10%), per capita income and distance (42.5%), and state contribution to gross domestic product (GDP) as criteria.
It also recommended that to bring more transparency on the divisible pool and effective decentralization, the government should disclose the net proceeds data certified by the CAG under Article 279 every year.
Further, the Commission recommended that States should comply with the constitutional provisions for regular constitution of the State Finance Commission (SFC) on the expiration of five years from the formation of the previous SFC and ensure that the Action Taken Report (ATR) is submitted to the State Legislative Assembly within 6 months of the submission of the SFC report.
The Commission also recommended that the fiscal deficit of states should be capped at 3% of their respective GSDP (excluding loans under SASCI) and to ensure stability of debts of the state government, this should be strictly enforced in accordance with clause (3) of Article 293 of the Constitution. The Union government is expected to reduce its fiscal deficit to 3.5 per cent of GDP by the end of the allocation period.
The government said it has accepted in principle the recommendation of the quantum (expressed as a percentage of GSDP) of states’ net borrowing limits. Other recommendations of the Commission, including those related to off-budget borrowing, modification of states’ FRLs and budget deficit of the Union government, will be considered separately, he said.
The recommendations of the Sixteenth Finance Commission cover the financial years 2026-27 to 2030-31, starting April 1, 2026.
For FY27, the total shared resources, fiscal decentralization and FC grants, with states through the Finance Commission, are estimated at ₹16.56 lakh crore in BE 2026-27. In BE 2026-27, tax devolution to states is estimated at ₹15.26 lakh crore, compared to ₹13.93 lakh crore in RE 2025-26, which includes an additional amount of ₹9,084.02 crore towards dues receivable by the Union government from states under devolution in previous years. Tax devolution to states in BE 2026-27 is 3.9% of GDP and 1.33 lakh crore more than tax devolution in BE 2025-26 (including past arrears).
