The 16th Finance Commission’s decision to tweak the formula through which central taxes are shared with the states, even while retaining states’ total share at 41 percent, has drawn mixed responses. By introducing each state’s contribution to India’s GDP as a new criterion with a 10 percent weight, the commission has made a token gesture towards rewarding the better-performing states. At the same time, it has downgraded demographic performance (rewarding population control) from 12.5 percent to 10 percent. The income distance criterion (measuring per-capita income against a benchmark state) was trimmed from 45 percent to 42.5 percent, while total population (per the 2011 Census) was bumped up to 17.5 percent from 15 percent, and total area slashed from 15 percent to 10 percent. The tweaks favouring economic performance hand gains in shares to Karnataka, Kerala, Tamil Nadu, Andhra Pradesh and Telangana despite the unchanged total share. In contrast, populous states such as Madhya Pradesh, Uttar Pradesh, West Bengal, Bihar and Odisha face losses or stagnation.
The real blow comes from the decision to abolish revenue deficit grants (RDGs) and state- or sector-specific grants. The southern states, already squeezed by GST impacts, are the hardest hit. Kerala’s tax share has risen marginally from 1.92 percent to 2.38 percent, well short of its demanded 2.79 percent; but its ₹53,137-crore fall in RDGs and other targeted aid would largely wipe out any benefit. Tamil Nadu has termed its minor increase to around 4.097 percent over five years as insultingly meagre, despite its blistering growth and outsized contributions to the national exchequer. Karnataka, boasting 8.7 percent of the national GDP and topping per-capita tax collections, is fuming over continued under-allocation.
The southern states are also protesting Delhi’s miserly disaster relief—while BJP-ruled states like Maharashtra and UP pocket generous aid—amid a tax kitty eroded by central cesses that are outside the divisible pool. Debt-laden states have resorted to off-budget borrowings to conduct daily operations and invest in capital expenditure. The commission has demanded they discontinue this practice and bring all borrowings onto offi cial budgets for transparency. With the Centre itself projecting a debt-to-GDP ratio of 55.6 percent in 2026-27, it has little appetite for the states’ cries for higher shares. Given the lack of elbow room, we can expect the decibel on demands to stay high for now.