The 16th Finance Commission, led by Arvind Panagariya, has scrapped revenue deficit, sector-specific, and state-specific grants in its recommendations for FY27 onwards. The move aims to push states toward fiscal discipline, urging them to expand tax and non-tax revenues, rationalize expenditure, and reduce subsidies. Analysts call it a bold structural reset.
In a landmark shift, the 16th Finance Commission (FC) has recommended discontinuing revenue deficit grants and other special allocations, marking a decisive break from past practices. The Commission argues that such grants perpetuated an “endless cycle of deficits” rather than solving structural fiscal imbalances.
The reset comes as part of the FY27 Union Budget, which begins the new FC cycle. States will now be expected to widen their revenue base, rationalize committed expenditure, and rein in subsidies to achieve fiscal sustainability. While the move is hailed as a step toward long-term discipline, experts caution that low-capacity states may face immediate challenges in balancing their budgets.
Key Highlights:
-
Policy Shift: Revenue deficit, sector-specific, and state-specific grants discontinued.
-
Objective: Encourage states to expand tax/non-tax revenues and reduce reliance on central transfers.
-
Rationale: Grants created persistent deficits instead of addressing fiscal gaps.
-
Impact: Debt-ridden states must rationalize expenditure and subsidies.
-
Concerns: Lower fiscal capacity states may struggle without transitional support.
The Commission’s recommendations signal a new era of fiscal responsibility, reshaping the relationship between the Centre and states while emphasizing sustainable revenue generation.
Sources: CNBC-TV18; Financial Express; The Hindu Business Line