The 16th finance commission has released its recommendations for 2026-2031, retaining states' share in the divisible tax pool at 41 percent. Southern states' allocation has risen from 15.8 percent to 17 percent, while emphasizing privatization of the power distribution sector and debt cleanup. The commission urged states to discontinue off-budget borrowings and rationalize subsidy schemes.
The 16th finance commission has sought to maintain balance in the federal structure, particularly addressing concerns of southern states. It has kept vertical devolution unchanged at 41 percent, but revised criteria and weights for horizontal devolution. This includes reworking population weights and adding states' contribution to GDP as a new criterion. As a result, the southern states—Andhra Pradesh, Telangana, Karnataka, Tamil Nadu, and Kerala—saw their collective share rise from 15.8 percent under the 15th commission to 17 percent. Increases were also noted for Gujarat, Maharashtra, Punjab, and Jharkhand, while Uttar Pradesh, Bihar, Madhya Pradesh, and Rajasthan experienced declines.
On the financial distress in power distribution companies (discoms), the commission conducted a detailed analysis. Public sector discoms' outstanding debt reached Rs 7.5 lakh crore by the end of 2023-24, with accumulated losses at Rs 6.77 lakh crore. The commission described privatization as essential for modernization and breaking the losses-debt-bailout cycle. It urged states to create special purpose vehicles (SPVs) to park working-capital loans and non-asset-backed debt. Prepayment or repayment of this debt post-privatization would qualify for central assistance under an incentive scheme. Citing bailouts in 2000-01, 2012-13, and 2015-16, the commission noted that discom debt adversely impacts state finances. In eight states—Andhra Pradesh, Bihar, Jharkhand, Karnataka, Maharashtra, Manipur, Meghalaya, and Telangana—debt growth outpaced revenues and assets, accounting for 36 percent of total sector debt in FY24. Seven states are responsible for 83 percent of losses and 78 percent of debt.
Additionally, the commission recommended capping fiscal deficit at 3 percent of GSDP, discontinuing off-budget borrowings, and rationalizing subsidies with sunset clauses for non-merit schemes. It emphasized privatizing discoms and loss-making public sector enterprises. Expenditure Secretary Vumlunmang Vualnam stated that incorporating GDP contribution in horizontal devolution promotes efficiency and equity, and the growing resource pool will benefit all states.
