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Polity & Governance May 23, 2026 5 min read Daily brief · #10 of 14

States to get VB-G RAM G funding based on 16th Finance Commission formula, ‘performance criteria’

The Ministry of Rural Development published draft implementation rules under the Viksit Bharat – Guarantee for Rozgar and Ajeevika Mission (Gramin) Act, 2025...

GS Paper II (Governance Centre-State Relations) GS Paper III (Indian Economy)

What Happened

  • The Ministry of Rural Development published draft implementation rules under the Viksit Bharat – Guarantee for Rozgar and Ajeevika Mission (Gramin) Act, 2025 (VB-G RAM G), inviting public feedback until June 21, 2026.
  • The draft rules propose that state funding allocations under the new scheme be determined using objective parameters drawn from the 16th Finance Commission's devolution formula.
  • A 16-member National Level Steering Committee (NLSC) is to be constituted to oversee implementation, recommend fund allocations to states, and coordinate among ministries — its composition must include five state government representatives, ensuring federal consultative balance.
  • The NLSC will be chaired by the Secretary, Department of Rural Development, with members drawn from the Ministries of Panchayati Raj, Environment, Agriculture, Water Resources, and Drinking Water and Sanitation, along with NITI Aayog and the National Informatics Centre.
  • The draft also lays out transition provisions governing the shift from MGNREGA, including the replacement of existing job cards with new smart job cards for beneficiary workers.
  • The VB-G RAM G Act, 2025, which received Presidential assent, will come into force from July 1, 2026 — the same date on which the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) stands repealed.

Static Topic Bridges

Finance Commission (Article 280)

The Finance Commission is a constitutional body established under Article 280 of the Constitution, constituted by the President every five years. Its mandate is to recommend the distribution of net proceeds of taxes between the Union and States (vertical devolution) and among states (horizontal devolution), and to lay down the principles governing grants-in-aid to states.

  • Article 280(1): President constitutes the Finance Commission every five years or earlier.
  • Article 280(3): Commission recommends distribution of Union tax proceeds and principles for grants-in-aid.
  • The Commission's recommendations are advisory — they require implementation through a Presidential Order.
  • Horizontal devolution criteria have historically included income distance, population, area, and forest cover.

Connection to this news: The draft VB-G RAM G rules propose using the 16th Finance Commission's objective parameters — rather than ad hoc administrative criteria — to determine normative fund allocations to states, embedding fiscal federalism principles into social-sector spending.

16th Finance Commission (2026–31)

The 16th Finance Commission, chaired by Dr. Arvind Panagariya, submitted its report in November 2025; it was tabled in Parliament on February 1, 2026. The Commission covers the award period 2026–27 to 2030–31.

  • Vertical devolution: 41% share of divisible pool for states — unchanged from the 15th Finance Commission.
  • Horizontal devolution formula weights: Income Distance (42.5%), Population-2011 Census (17.5%), Demographic Performance (10%), Area (10%), Forest and Ecology (10%), Contribution to National GDP (10% — a new parameter replacing the 15th FC's Tax and Fiscal Effort).
  • Total grants for local bodies recommended at ₹7.91 lakh crore over 2026–31.
  • The 16th FC was set up in December 2023; Dr. Panagariya is a former Vice-Chairman of NITI Aayog and Columbia University economist.

Connection to this news: By anchoring VB-G RAM G fund allocations to the 16th FC formula, the Centre introduces a transparent, formula-based mechanism for social-sector transfers — moving away from discretionary allocation toward rule-based fiscal federalism.

MGNREGA — The Predecessor Legislation

The Mahatma Gandhi National Rural Employment Guarantee Act, 2005 (enacted August 23, 2005; implemented February 2006) was India's flagship demand-driven rural employment guarantee programme. It conferred a legal right to 100 days of unskilled manual work per rural household per financial year.

  • Enacted under UPA government; notified under the National Rural Employment Guarantee Act, 2005 (renamed in 2009).
  • Schedule I of the Act listed permissible works: water conservation, drought-proofing, rural connectivity, land development, and flood-control works.
  • Wage paid at notified State minimum wage rates; employer-of-last-resort model — if work not provided within 15 days, beneficiaries are entitled to an unemployment allowance.
  • Women guaranteed at least one-third of total employment.
  • Approximately 15.5 crore active job card holders at peak; annual expenditure exceeded ₹1 lakh crore in recent years.

Connection to this news: The VB-G RAM G Act formally repeals MGNREGA from July 1, 2026, raising the employment guarantee from 100 to 125 days and introducing Viksit Gram Panchayat Plans as the demand articulation mechanism — replacing the earlier demand-driven household model with a convergence-based village development planning approach.

Performance-Based Allocation and Fiscal Federalism

Centre-state fiscal relations in India involve both formula-based tax devolution and discretionary transfers (Centrally Sponsored Schemes). The shift toward performance-linked criteria in grant allocations — pioneered by the 15th Finance Commission for local bodies — introduces accountability incentives into intergovernmental transfers.

  • Article 275: Parliament may make grants to states in need of assistance (gap-filling grants).
  • Centrally Sponsored Schemes (CSS) operate through cost-sharing ratios (typically 60:40 Centre-State for general states).
  • Performance-based grants condition releases on verifiable outcomes — expenditure quality, social audit compliance, scheme implementation metrics.
  • The NLSC's role in recommending state-level allocations under VB-G RAM G introduces a technocratic oversight layer absent under MGNREGA's demand-driven architecture.

Connection to this news: The embedding of performance criteria alongside 16th FC formula parameters in VB-G RAM G allocations represents a structural shift: states that implement VGPPs effectively, maintain digital records, and conduct social audits are likely to receive larger fund releases — incentivizing governance quality alongside employment delivery.

Key Facts & Data

  • Full form: VB-G RAM G = Viksit Bharat – Guarantee for Rozgar and Ajeevika Mission (Gramin)
  • Legislation: VB-G RAM G Act, 2025 — received Presidential assent in December 2025
  • Effective date: July 1, 2026 (MGNREGA repealed simultaneously)
  • Employment guarantee: 125 days per rural household per year (up from MGNREGA's 100 days)
  • Key innovation: Viksit Gram Panchayat Plans (VGPPs) as convergence-based local development plans, prepared by Gram Panchayats and approved by Gram Sabhas
  • NLSC composition: 16 members; Secretary, Department of Rural Development as chair; must include 5 state representatives
  • Draft rules feedback deadline: June 21, 2026
  • 16th Finance Commission vertical devolution: 41% of divisible pool to states (2026–31)
  • States' pause provision: States may notify up to 60 days' aggregate pause during peak agricultural seasons without reducing the 125-day entitlement
On this page
  1. What Happened
  2. Static Topic Bridges
  3. Finance Commission (Article 280)
  4. 16th Finance Commission (2026–31)
  5. MGNREGA — The Predecessor Legislation
  6. Performance-Based Allocation and Fiscal Federalism
  7. Key Facts & Data
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