What Happened
- The 16th Finance Commission's recommendations, tabled in Parliament on 1 February 2026, have triggered a political standoff in Himachal Pradesh, with the Congress-led state government accusing the Centre of undermining fiscal federalism and the BJP defending the Commission's formula changes.
- The key points of contention are: (a) the discontinuation of Revenue Deficit Grants (RDGs) for all 17 recipient states, which costs Himachal approximately Rs 6,000 crore annually; and (b) changes to the horizontal devolution formula, including higher weightage for population (based on Census 2011) and a new "Contribution to GDP" criterion that benefits larger, economically productive states.
- CM Sukhu called the RDG a constitutional right of the people, not temporary support, and sought all-party cooperation to press the state's case with the Centre.
- BJP leader Anurag Thakur countered that Himachal's share in the divisible pool actually increased from 0.830% (15th FC) to 0.914% (16th FC), translating to approximately Rs 2,388 crore more in devolution, and that the Congress government was creating unnecessary panic.
- The controversy highlights the structural tension between efficiency-oriented and equity-oriented criteria in fiscal devolution, and the specific vulnerabilities of small, hilly, special category states.
Static Topic Bridges
Finance Commission -- Constitutional Provisions and Functions (Article 280)
The Finance Commission is a constitutional body established under Article 280 of the Constitution. The President constitutes a Finance Commission every five years (or earlier), consisting of a Chairman and four other members. Its core functions under Article 280(3) include: recommending the distribution of net proceeds of taxes between the Union and the States (vertical devolution); the allocation of such proceeds among the States themselves (horizontal devolution); the principles governing grants-in-aid to states under Article 275; and measures to supplement resources of Panchayats and Municipalities (added by the 73rd and 74th Constitutional Amendments, 1992). The qualifications for members are determined by Parliament under the Finance Commission (Miscellaneous Provisions) Act, 1951.
- 16th Finance Commission: Constituted 31 December 2023; Chairman -- Dr Arvind Panagariya (former Vice-Chairman, NITI Aayog); Members -- Ajay Narayan Jha (former Finance Secretary), Annie George Mathew (former Special Secretary, Expenditure), Dr Niranjan Rajadhyaksha (Executive Director, Artha Global); Part-time Member -- Soumya Kanti Ghosh (Group Chief Economic Advisor, SBI); Secretary -- Ritvik Ranjanam Pandey
- Report period: 2026-27 to 2030-31 (five years)
- Advisory nature: Finance Commission recommendations are not legally binding on the government, but have been historically accepted. The government tables an Action Taken Report in Parliament explaining any deviations
- Distinction from other bodies: Finance Commission (Art 280) -- tax devolution and grants; GST Council (Art 279A, inserted by 101st Amendment, 2016) -- GST rates and implementation; Planning Commission/NITI Aayog -- plan transfers (now largely subsumed into FC recommendations after Planning Commission dissolution in 2015)
Connection to this news: The 16th FC's decision to discontinue RDGs and alter the horizontal formula has placed the institution at the centre of a political debate. The BJP argues the Commission is independent and formula-based; the Congress argues that specific states' needs (special category, hilly terrain, strategic borders) were inadequately considered.
Vertical vs Horizontal Devolution -- Formula and Criteria
Tax devolution has two dimensions. Vertical devolution determines the share of central taxes that goes to states collectively (currently 41% of the divisible pool). Horizontal devolution determines how that 41% is distributed among the 28 states. The horizontal formula is where the policy choices of each Finance Commission become most contentious, as the criteria and weightages determine which states gain and which lose.
15th Finance Commission Formula (2021-26): | Criterion | Weightage | |---|---| | Income Distance | 45.0% | | Population (Census 2011) | 15.0% | | Area | 15.0% | | Demographic Performance (TFR-based) | 12.5% | | Forest & Ecology | 10.0% | | Tax & Fiscal Effort | 2.5% |
16th Finance Commission Formula (2026-31): | Criterion | Weightage | |---|---| | Income Distance | 42.5% | | Population (Census 2011) | 17.5% | | Contribution to GDP (NEW) | 10.0% | | Demographic Performance (population growth 1971-2011) | 10.0% | | Forest Cover | 10.0% | | Area | 10.0% |
Key changes in 16th FC: - Tax & Fiscal Effort (2.5%) scrapped; replaced by Contribution to GDP (10%) -- a net gain of 7.5 percentage points for efficiency-oriented criteria - Population weightage increased by 2.5 percentage points (15% to 17.5%) - Area weightage reduced by 5 percentage points (15% to 10%) - Demographic performance weightage reduced by 2.5 percentage points (12.5% to 10%) and methodology changed: 15th FC used Total Fertility Rate (TFR); 16th FC uses inverse of population growth between 1971 and 2011 Census - Income Distance weightage reduced by 2.5 percentage points (45% to 42.5%); calculated as gap between state per capita GSDP and average of top three large states
Connection to this news: The formula changes produce winners and losers. Southern states (Karnataka, Kerala, Tamil Nadu, Telangana) and industrialized western states (Maharashtra, Gujarat) gained from the new GDP contribution criterion and reduced demographic performance weight. Smaller states with high area-to-population ratios (like Himachal Pradesh) and states that benefited from high area and demographic performance weights lost relatively. For Himachal, even though its share in the divisible pool rose from 0.830% to 0.914%, this increase does not compensate for the Rs 6,000 crore annual loss from RDG discontinuation.
Census-Based Population Criteria -- The 1971 vs 2011 Controversy
The choice of Census year for the population criterion has been politically contentious since the 14th Finance Commission. Until the 13th FC, the 1971 Census was used for population weightage, which rewarded southern states that had achieved lower population growth rates. The 14th FC (2015-20) shifted to Census 2011, benefiting high-population-growth northern states (Uttar Pradesh, Bihar, Madhya Pradesh, Rajasthan). The 15th FC retained Census 2011 and added a separate "demographic performance" criterion (12.5% weight, based on TFR) to partially compensate southern states. The 16th FC continues with Census 2011 for population but changed the demographic performance methodology.
- 1971 Census freeze: Originally adopted to not penalize states that successfully implemented family planning. Southern states (Tamil Nadu, Kerala, Andhra Pradesh) had much lower population growth than northern states (UP, Bihar, MP)
- 14th FC shift to 2011 Census: Argued that 1971 data was 40+ years old and no longer representative. Southern states objected strongly
- 16th FC approach: Uses Census 2011 for population (17.5% weight); demographic performance (10% weight) measured as the inverse of population growth between 1971 and 2011 -- i.e., states with lower population growth between these periods get a higher per capita share
- Southern states' concern: Despite the demographic performance criterion, the aggregate effect of Census 2011 population data benefits UP (which gets the largest single state share) at the expense of more economically productive, lower-population-growth southern states
- Relevance of Census 2021: The decennial Census 2021 was delayed due to COVID-19; its conduct and data (if completed before the next FC) could significantly alter devolution shares
Connection to this news: For Himachal Pradesh (population approximately 73 lakh by 2011 Census, one of India's smallest states), the increase in population weightage from 15% to 17.5% is disadvantageous because its small population means a small absolute share. This is compounded by the reduction in area weightage (15% to 10%), which hurts hill states with large, difficult terrain relative to population. The BJP's counter-argument that Himachal's overall share rose (0.830% to 0.914%) reflects gains from other criteria (income distance, forest cover) that partially offset these losses.
Special Category States and Fiscal Dependence
The concept of Special Category States was introduced in 1969 based on the recommendations of the 5th Finance Commission. States given this status received preferential treatment in central plan assistance (historically 90% grant and 10% loan, compared to 70:30 for general category states), higher central funding ratios for CSS, and other fiscal concessions. After the dissolution of the Planning Commission in 2015 and the 14th FC's substantial increase in tax devolution (32% to 42%), the formal Special Category Status framework was effectively wound down, though some states continue to receive differential treatment through other mechanisms.
- Original Special Category States (1969): Assam, Nagaland, Meghalaya, Manipur, Mizoram, Tripura, Arunachal Pradesh, Sikkim, Jammu & Kashmir, Himachal Pradesh, Uttarakhand (11 states at peak)
- Criteria: Hilly and difficult terrain, low population density, strategic international borders, economic and infrastructure backwardness, non-viable state finances
- After 14th FC (2015): Planning Commission abolished; special category status framework largely discontinued. The Finance Commission's grants-in-aid (including RDGs) became the primary mechanism for additional support to fiscally weak states
- After J&K reorganization (2019): J&K became a Union Territory; only 10 states retained special category considerations
- Himachal Pradesh: Receives no special category status CSS funding advantages since 2015; was entirely dependent on Finance Commission grants (especially RDGs) for fiscal sustainability
Connection to this news: The discontinuation of RDGs is particularly damaging for former special category states like Himachal Pradesh, which lost their preferential CSS funding after 2015 and now lose their primary remaining fiscal safety net (RDGs). CM Sukhu's reference to Himachal as a "special category state entitled to the Centre's funding" invokes a framework that has been formally weakened but remains politically potent.
Key Facts & Data
- 16th Finance Commission: Chaired by Dr Arvind Panagariya; constituted 31 December 2023; report covers 2026-27 to 2030-31
- Vertical devolution: 41% of divisible pool to states (unchanged across 15th and 16th FC)
- 16th FC horizontal formula: Income Distance 42.5%, Population 17.5%, GDP Contribution 10%, Demographic Performance 10%, Forest 10%, Area 10%
- 15th FC horizontal formula: Income Distance 45%, Population 15%, Area 15%, Demographic Performance 12.5%, Forest 10%, Tax Effort 2.5%
- RDGs discontinued for all 17 recipient states under 16th FC (previously Rs 2,94,514 crore total under 15th FC)
- Himachal Pradesh share: increased from 0.830% (15th FC) to 0.914% (16th FC) -- approximately Rs 2,388 crore more in devolution
- But Himachal lost approximately Rs 37,199 crore in RDG over five years (approximately Rs 7,440 crore/year under 15th FC)
- Net estimated loss for HP: approximately Rs 6,000 crore annually in 2026-27
- Special Category Status: introduced 1969, 5th Finance Commission; 11 states at peak; framework effectively wound down after 14th FC (2015)
- 14th FC shifted population criterion from Census 1971 to Census 2011; retained by 15th and 16th FC
- Article 280: Finance Commission constituted every five years; Chairman + 4 members; recommendations advisory but historically accepted
- Article 275(1): Constitutional basis for grants-in-aid to states "in need of assistance"