The Sixteenth Finance Commission has announced its members and is set to begin its work. As an important part of India’s federal architecture, the Finance Commission plays a crucial role in recommending the division of resources between the Government of India (GOI) and the states, as well as how resources are to be distributed among the states. The Commission’s recommendations also influence GOI’s budget arithmetic and resource transfers.
There are two main asymmetries in India’s federal system that the Finance Commission needs to address: the greater percentage of GDP expenditures incurred by states compared to GOI, and the varying financial needs and capabilities of different states. The Commission operates based on its terms of reference (ToR), which are currently limited compared to its predecessor’s. However, it is not unusual for ToRs to be expanded during the Commission’s functioning period.
The Sixteenth Finance Commission will face challenges such as data gaps and political concerns among southern states about the possibility of delimitation of parliamentary seats. The delay in conducting the 2021 Census means that the Commission lacks valuable data, particularly for population projections. Additionally, while delimitation is unrelated to the Commission’s remit, the political implications surrounding it are likely to affect the Commission. It will be crucial for the Commission’s efforts to be seen as fair and unbiased.
The Commission will make its recommendations after consulting extensively with both GOI and the states. Its functioning over the next 21 months before the October 2025 deadline will be a real-time experiment in federalism. It is important that the Commission’s work is perceived as fair and balanced, as its recommendations will have a significant impact on resource distribution and budget arithmetic.