KOCHI: For a state that has long argued it is being penalised for doing the “right things” — controlling population growth, investing in human development and raising its own revenues — the Sixteenth Finance Commission (FC-16) has brought a measure of relief to Kerala, though not without fresh caveats.
Under the FC-16 award for 2026–31, Kerala’s share in the divisible pool of central taxes has risen to 2.382%, reversing the marginal erosion it witnessed under recent Finance Commissions. While this uptick offers some breathing space, experts caution that the overall picture remains mixed, with tighter fiscal conditions and the withdrawal of key grants tempering the gains.
Lekha Chakraborty, professor at National Institute of Public Finance and Policy (NIPFP), told TNIE that for Kerala, a high human development and low-fertility state, the FC-16 outcomes are “mixed but slightly improved”.
“Its inter se share rises to 2.38% from the 15th Finance Commission’s 1.93%, but remains lower than the 14th Finance Commission’s 2.50%. Earlier, high revenue deficit grants helped Kerala amid a fiscal space crunch. That is no longer the story with the abandonment of revenue deficit grants,” she said.
Chakraborty noted that a key change in the tax transfer formula is the introduction of an efficiency-related criterion — contribution to GDP — which could favour states such as Maharashtra, Tamil Nadu and Gujarat more than Kerala.
“Kerala’s leadership in fiscal decentralisation should help it access local body fund transfers under the 16th FC. However, these are ‘tied grants’, which can affect fiscal autonomy and flexibility at the local level,” she added.
The new GDP-contribution criterion works to some extent in Kerala’s favour. As a relatively high-income, service-driven economy with a steady contribution to national output, the state benefits from this efficiency tilt — a factor that was largely absent in earlier awards.
Equally significant for Kerala is the retention of demographic performance as a criterion. This continues to reward states that succeeded in lowering fertility rates, addressing long-standing concerns that low-fertility states might be penalised due to ageing populations. Kerala’s low total fertility rate (TFR) ensures a higher share under this parameter, partly offsetting the disadvantage of using the 2011 Census population data.
However, the relief is far from complete. The per-capita GSDP (Gross State Domestic Product) distance criterion, with its dominant 42.5% weight, continues to heavily favour poorer states such as Uttar Pradesh and Bihar, which together corner over a quarter of the total pool. As a relatively high-income state, Kerala inevitably loses ground here.
M Suresh Babu, director of Madras Institute of Development Studies, said the marginal increase in devolution is nevertheless crucial for Kerala. “The state’s expenditure pattern is changing, and the scope for revenue mobilisation is limited,” he said, adding that the Finance Commission’s decision to cap Kerala’s fiscal deficit at 3% of GSDP for 2026–31 is aimed at discouraging off-budget borrowings.
“Kerala often resorts to such borrowings, but it is time to discontinue this practice. It is a mixed bag — the share has increased, but the fiscal space is tightening,” he observed.
Compounding this concern, a report by the Kochi-based Centre for Socio-economic & Environmental Studies notes that while FC-16 retained the vertical share of states, the discontinuation of specific-purpose grants and revenue deficit grants is a severe blow.
“In effect, the quantum of total Finance Commission transfers to states appears to be declining. Kerala seems to be a major victim,” the report said.