Relevance: GS II – Indian Constitution & Governance; GS III – Indian Economy
Source: Press Information Bureau; Ministry of Finance updates

The Sixteenth Finance Commission (16th FC), chaired by Arvind Panagariya, has submitted its report for the period 2026–2027 to 2030–2031 to the President of India. The report outlines tax-sharing formulas, grants-in-aid, and financial principles that will govern Centre-State fiscal relations for the next five years.

What is the Finance Commission? 

The Finance Commission is a constitutional body established under Article 280. It is appointed every five years by the President to recommend:

• Vertical devolution: Share of central taxes transferred to states.
• Horizontal devolution: Distribution among states based on criteria such as population, income distance, equity, etc.
• Grants-in-aid: Revenue deficit grants, sector-specific grants, disaster grants.
• Measures to strengthen the finances of panchayats and municipalities.
• Its recommendations must be placed before Parliament under Article 281.

Key Recommendations

A. Tax Devolution

B. Grants & Disaster Finance

• Revenue deficit grants for fiscally stressed states.
• Refined framework for disaster risk financing, aligned with the Disaster Management Act and rising climate vulnerabilities.

C. Local Government Finances

• Strengthening resource flow to panchayats and urban local bodies, linked to State Finance Commission reforms, urbanisation needs, and service delivery performance.
  

Why the 16th FC Matters

1. Fiscal Federalism & Equity

• The FC determines state-wise share of taxes, influencing welfare, infrastructure, and social spending. It must balance equity for poorer states with efficiency incentives for better-performing states.

2. Macroeconomic Stability

• Amid rising public debt, the FC guides sustainable borrowing and coordinated fiscal discipline between the Centre and States.

3. Climate & Disaster Finance

• With frequent climate shocks, FC recommendations shape disaster preparedness, resilience funding, and climate-related fiscal buffers.

4. Local Governance Strengthening

• Predictable transfers to panchayats and urban local bodies are vital for sanitation, mobility, urban services, and climate action.

One-line Wrap:

The 16th Finance Commission provides India’s fiscal roadmap for 2026–31—anchoring cooperative federalism, fiscal stability, and equitable development.

UPSC Mains Question:

“Examine the role of the Finance Commission in strengthening fiscal federalism in India. How may the recommendations of the 16th FC shape Centre–State financial relations in the coming decade?”