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Informist, Friday, Mar. 6, 2026

 

NEW DELHI – The 16th Finance Commission's emphasis that states reduce revenue deficits and undertake growth-oriented capital outlays is positive for their long-term fiscal health, Crisil Ratings said Friday. In the near term, challenges persist for states with limited incremental fiscal support, the rating agency said. 

 

The Commission, whose report was accepted by the Centre in February, recommended retaining states' share in central taxes at 41% for five years starting 2026-27 (Apr-Mar). The Commission, chaired by economist Arvind Panagariya, also tweaked the formula for determining the horizontal tax share that pertains to the distribution of states' share among individual states.

 

The Commission cut the weight given to income distance criteria – the largest determinant of horizontal share - to 42.5% from 45% recommended by the previous panel. It hiked the weight given to population criteria to 17.5% from 15?rlier, and cut the weight given to demographic performance by 2.5% to 10%. The Panagariya-led panel kept the weightage given to area and forest cover metrics unchanged at 10?ch. Interestingly, it removed the tax and fiscal efforts metric – attracting 2.5% weight under the 15th panel – entirely, and introduced a new metric – contribution to GDP with a 10% weight. 

 

The addition of contribution to GDP for distribution of taxes between states will nudge them to focus on long-term growth-oriented capital outlays, Crisil said. The Commission did not recommend that states receive revenue-deficit grants, which were given under previous finance commissions to meet revenue gaps and provide critical spending.

 

"Discontinuation of RD (revenue deficit) grants can compel states to constrain populist spending," Anuj Sethi, senior director at Crisil, said. "Social welfare expenditure is estimated to have increased sharply to around 1.9% of gross state domestic product in fiscal 2026 from around 1.5% in fiscal 2024, with around 43% of the increase pertaining to direct transfer schemes."

 

With vertical devolutions to states retained at 41%, incremental revenue support to states from the Centre is limited, Aditya Jhaver, director at the rating agency, said. "Navigating the near-term challenges and implementation of the recommendations will, therefore, remain key monitorables to assess the credit profiles of states," Crisil said. 

 

The raing agency expects states' revenue deficit to remain high in FY27, around 0.9% of the gross state domestic product estimated for FY26, on account of moderate revenue growth and sticky committed and welfare expenditures, Crisil said.  End

 

Reported by Shubham Rana

Edited by Vandana Hingorani

 

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