Combined central-state debt to drop to 73.1% of GDP by 2030-31

The 16th Finance Commission (chaired by Dr. Arvind Panagariya) examined Centre-state fiscal relations for the period 2026-31, recommending how central taxes are shared with states and how grants are allocated to local bodies and disaster management.

Who it concerns: This concerns the Government of India (Centre), State Governments, and Union Territories. It directly affects citizens through the allocation of funds to rural and urban local bodies, disaster relief funds, and state-level fiscal policies regarding subsidies and public sector enterprises.

What the committee found

• Recommended a 41% share of the divisible pool of central taxes for states, unchanged from the 15th Finance Commission.
• Changed distribution criteria: increased weightage for Income Distance (42.5%) and Population (17.5%), introduced 'Contribution to GDP' (10%), and removed 'Tax and Fiscal Efforts'.
• Recommended total grants-in-aid of Rs 9.47 lakh crore, comprising Rs 7.91 lakh crore for local governments and Rs 1.56 lakh crore for disaster management.
• Discontinued revenue deficit grants, sector-specific grants, and state-specific grants previously recommended by the 15th Finance Commission.
• Recommended the Centre reduce its fiscal deficit to 3.5% of GDP by 2030-31 and set a 3% of GSDP limit for state fiscal deficits.
• Recommended strictly discontinuing off-budget borrowings for states and expanding the definition of fiscal deficit to include all such borrowings.
• Recommended states pursue the privatisation of electricity distribution companies (DISCOMs) and create special purpose vehicles to warehouse debt.
• Recommended states review and rationalise subsidy expenditure, set clear exclusion criteria for cash transfers, and adopt a uniform approach for accounting subsidies.
• Recommended the review and closure of 308 inactive State Public Sector Enterprises (SPSEs) and the formulation of a state-level disinvestment policy.

Also in the document

• The Commission projected the combined debt of central and state governments to decline from 77.3% of GDP in 2026-27 to 73.1% in 2030-31.
• Rs 56,100 crore was specifically allocated for a Special Infrastructure Component for wastewater management in 22 eligible cities with populations between 10-40 lakh.
• The cost-sharing pattern for disaster management funds is recommended at 90:10 (Centre:State) for north-eastern and Himalayan states, and 75:25 for all other states.