There are no items in your cart
Add More
Add More
| Item Details | Price | ||
|---|---|---|---|
Passage:
In its much-awaited recommendations, which were also tabled on Sunday, the Sixteenth Finance Commission (FC-16), as anticipated, has recommended that the vertical devolution ratio — the States’ share in the divisible pool of Central taxes — be retained at 41% for the period 2026-31. States want this to be 50%. This is despite the Commission acknowledging the tightening fiscal space States face under the GST framework, and that the growing mismatch between expenditure responsibilities and assured revenues has increasingly left them with “recourse to market borrowings” as the principal adjustment mechanism. Predictably, several States have criticised the projected devolutions for the coming fiscal but have also cautiously welcomed a tweak in the horizontal devolution formula. The FC-16 has reworked the earlier “tax effort” criterion into a broader “contribution to GDP” measure and raised its weight sharply — from 2.5% under the FC-15 to 10%. This change is intended to reward productive and efficient States and represents a modest but meaningful attempt to link governance outcomes with fiscal transfers.
However, the resulting gains are deliberately restrained. The FC-16 makes it clear that any restructuring of horizontal devolution must be undertaken “gradually”, to avoid abrupt redistributive shocks to States that are more dependent on transfers. Accordingly, the weight accorded to demographic performance has been reduced, reflecting the view that penalising population growth is no longer appropriate at a time when India is close to the peak of its demographic dividend. Conversely, the weight for population size has been modestly increased. The net effect is that industrialised States such as Tamil Nadu and Maharashtra see only incremental improvements in their inter-State shares. This caution is understandable but also underscores the limits of the Commission’s ambition. A stronger signal could have been sent through a staggered increase in vertical devolution, for instance by committing to raise the States’ share to 45% by 2031, expanding discretionary fiscal space while preserving stability. The FC-16 flags the shrinking of the effective divisible pool due to cesses and surcharges but stops short of correcting this by recommending their inclusion in the pool. To be sure, total transfers to States are budgeted to rise by 12.2% between 2025-26 (RE) and 2026-27 (BE). But ₹1.2 lakh crore — or about 42% of this increase — is from revenue transfers under Centrally Sponsored Schemes, reinforcing a governance model in which States act as implementers of priorities set in New Delhi. The FC-16’s recommendations recognise the stresses in State finances but do not push for the structural change needed to restore the balance in fiscal federalism.
Difficult English Vocabulary from the Editorial
1. Devolution
Meaning: The transfer of powers or responsibilities from the central government to subnational governments, like States or local authorities.
Example: The devolution of fiscal powers to States is a significant aspect of India's federal system.
2. Tightening
Meaning: Becoming stricter, more constrained, or limited.
Example: The tightening fiscal space faced by States under the GST framework has made it harder for them to manage their finances effectively.
3. Recourse
Meaning: A source of help or strength in a difficult situation.
Example: States are increasingly having to rely on market borrowings as a recourse to manage their fiscal challenges.
4. Modest
Meaning: Not large, elaborate, or extreme; limited in size or scope.
Example: The Commission's recommendations bring about only modest improvements for industrialized States like Tamil Nadu and Maharashtra.
5. Incremental
Meaning: Gradual or small increases over time.
Example: The recommended changes in the horizontal devolution formula result in incremental improvements rather than sweeping reforms.
6. Restructuring
Meaning: The act of changing or reorganizing something, typically to improve it.
Example: The Finance Commission has recommended a restructuring of the horizontal devolution formula to reflect the contribution to GDP.
7. Gradual
Meaning: Occurring in small stages over time rather than suddenly.
Example: The FC-16 recommends gradual changes to the devolution formula to avoid abrupt shocks to States reliant on transfers.
8. Redistributive
Meaning: Involving the redistribution of wealth, resources, or power.
Example: The horizontal devolution reform seeks to avoid redistributive shocks that could disadvantage some States.
9. Staggered
Meaning: Arranged in intervals or at different times.
Example: A staggered increase in the States' share of the divisible pool could have expanded their fiscal space gradually over time.
10. Penalising
Meaning: To impose a penalty or disadvantage.
Example: The previous system of fiscal devolution was criticized for penalising States with high population growth rates.
MCQ 1: What is the main reason States criticize the Sixteenth Finance Commission's (FC-16) recommendations?
A) The reduction in their share of the divisible pool.
B) The Commission's failure to include cesses and surcharges in the divisible pool.
C) The recommendation to reduce population-based devolution.
D) The retention of the vertical devolution ratio at 41%.
MCQ 2: What new criterion has the FC-16 introduced in its horizontal devolution formula?
A) Contribution to population growth
B) Contribution to GDP
C) Tax collection efficiency
D) Taxpayer compliance rate
MCQ 3: How does the FC-16 plan to avoid abrupt changes in fiscal transfers?
A) By making drastic increases in the vertical devolution ratio.
B) By restructuring horizontal devolution gradually.
C) By reducing the weight of population size in the devolution formula.
D) By eliminating the impact of cesses and surcharges on the divisible pool.
MCQ 4: What is the effect of the FC-16's recommendation on industrialized States like Tamil Nadu and Maharashtra?
A) They will experience significant increases in their share of fiscal transfers.
B) They will experience only incremental improvements in their share of fiscal transfers.
C) They will see a decrease in their share of fiscal transfers.
D) They will no longer be eligible for any fiscal transfers.
MCQ 5: What does the editorial suggest about the overall ambition of FC-16’s recommendations?
A) They are overly ambitious and lack practicality.
B) They are cautious, reflecting the limits of the Commission's ambition.
C) They focus solely on penalizing States with high population growth.
D) They are radical and significantly shift the fiscal relationship between the Centre and States.
MCQ 6: What does the editorial suggest regarding the inclusion of cesses and surcharges in the divisible pool?
A) It is essential to include them to restore balance in fiscal federalism.
B) The Commission should have eliminated them from the fiscal system entirely.
C) The FC-16 acknowledged their impact but stopped short of recommending their inclusion in the divisible pool.
D) Cesses and surcharges should be used exclusively for Centrally Sponsored Schemes.
MCQ 7: According to the editorial, what is one of the reasons the FC-16's approach is seen as inadequate?
A) It lacks any recognition of the fiscal challenges faced by States.
B) It offers modest changes without pushing for the structural reforms needed in fiscal federalism.
C) It shifts the fiscal burden entirely to the States.
D) It proposes a complete overhaul of the current devolution framework.
Answers and Explanations:
Answer 1: D) The retention of the vertical devolution ratio at 41%.
Explanation: States criticized the FC-16 for maintaining the vertical devolution ratio at 41%, rather than increasing it to 50% as many States had hoped. This was seen as a failure to address their growing fiscal challenges.
Answer 2: B) Contribution to GDP
Explanation: The FC-16 introduced the "contribution to GDP" measure in its horizontal devolution formula, replacing the "tax effort" criterion. This change rewards States based on their economic productivity rather than just tax collection efforts.
Answer 3: B) By restructuring horizontal devolution gradually.
Explanation: The FC-16 emphasized that any restructuring of horizontal devolution should be gradual to avoid disruptive shocks to States that rely heavily on financial transfers from the Centre.
Answer 4: B) They will experience only incremental improvements in their share of fiscal transfers.
Explanation: Industrialized States like Tamil Nadu and Maharashtra will see incremental improvements in their share of fiscal transfers, but the changes will not be dramatic due to the Commission's cautious approach.
Answer 5: B) They are cautious, reflecting the limits of the Commission's ambition.
Explanation: The editorial describes the FC-16's approach as cautious and highlights that while the recommendations acknowledge the fiscal challenges faced by States, they lack the structural changes needed for a true shift in fiscal federalism.
Answer 6: C) The FC-16 acknowledged their impact but stopped short of recommending their inclusion in the divisible pool.
Explanation: The editorial points out that FC-16 recognized the negative impact of cesses and surcharges on the divisible pool but did not recommend including them in the pool, which would have allowed more funds for State transfers.
Launch your Graphy