The Sixteenth Finance Commission (FC-16) is a constitutional mechanism for fiscal transfers between the Union and States. The central action under discussion is FC-16’s restructuring of grants-in-aid and related transfer design, even as FC-16 retains vertical tax devolution to States at 41%.
Background and earlier position
Finance Commissions are expected to sustain the fiscal federal compact by mediating the Union’s fiscal dominance over States and correcting horizontal inequalities across States. Earlier Finance Commissions are described as generally aligning with the equalising intent.
What changed in FC-16 now
FC-16 retains vertical devolution of central taxes to States at 41%, but the transfer structure—especially grants-in-aid—is argued to have shifted toward efficiency and performance. The shift includes reducing grants-in-aid as a share of total Finance Commission transfers and eliminating Revenue Deficit Grants (RDGs) as well as sector-specific and State-specific grants.
Why it matters for equalisation and State autonomy
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