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Charting the path for the Sixteenth Finance Commission

  • Published
    29th Jul, 2023


The upcoming Sixteenth Finance Commission faces several challenges due to critical changes since the formation of the Fifteenth Finance Commission, including the impact of COVID-19 and geopolitical issues. The government debt-GDP ratio has surged to around 90% by the end of 2020-21, and many states are grappling with significant fiscal imbalances.

The vertical and horizontal dimensions

  • State’s share: The Fourteenth Finance Commission increased the share of States in central taxes to 42% (later revised to 41% for 28 States) but further increases may not be recommended due to the Centre's fiscal imbalances.
  • Setting upper limit: The 16th Finance Commission should scrutinize the heavy reliance on cesses and surcharges (18.5% of Centre's GTR) and consider setting an upper limit for these components, with an increase in States' share if exceeded.
  • Addressing lower income states: While some States argue for reducing the weight given to per capita income as a determining factor for shares, attention must be given to the needs of lower income States.


  • Above norms: The combined debt-GDP ratio of central and State governments peaked at 89.8% in 2020-21, well above the corresponding FRBM norms of 40% and 20% respectively. The fiscal deficit for the Centre was 9.2% of GDP, and for States, it was 4.1%, further deviating from the norms.
  • Re-examination: The 2018 amendment to the Centre's FRBM needs to be re-examined in light of the significant departures from debt and fiscal deficit to GDP ratios and the reduction of States' debt-GDP target to 20%.
  • Concerns: Concerns are raised about certain State governments having higher debt and fiscal deficit numbers relative to their GSDPs, often leading to increased fiscal deficits.

Reforms worth pursuing

  • Establish an independent loan council: To oversee loan magnitudes and profiles of central and State governments, as recommended by the 12th Finance Commission.
  • Examine non-merit subsidies: Excluding 'unjustified' subsidies to avoid political controversies in grant determination.
  • State’s limits: Be strict about States adhering to fiscal deficit limits, offering rewards for compliant States, and penalties for those exceeding limits by controlling borrowing.
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