The Central government has appointed noted economist and well-known advocate of free markets, Arvind Panagariya, as the chairman of the 16th Finance Commission. The commission is a lynchpin of federalism in India. It is mandated to recommend ways of dividing tax revenues between the Central and state governments.
It is, therefore, important to appoint persons who are not seen to be partisan to any administration. Panagariya fits this bill as he was vocal in pointing out faults in India’s economic policy, including Atmanirbhar Bharat, though he served as the vice-chairman of Niti Aayog for two years (2015-2017) during the first Narendra Modi government.
The recommendations of the commission for 2026-27 to 2030-31, which will be submitted to the President by October 31, 2025, will be crucial in view of demands by economically progressive states in the south and the west about the weightage given to population in tax devolution.
As per the scheme proposed by the 15th Finance Commission, 15 per cent weightage is given to the size and population of a state. While it is important to ensure that each citizen gets financial support from the Central government, another argument is that any further increase would serve as a disincentive to state governments in taking sound financial decisions.
Currently, states get 41 per cent share in the pool of central taxes such as income-tax, central GST, excise duty among others. The Central government, however, has been levying several taxes in form of surcharges, and cess which are not shared with the states, putting fiscal imbalance between two power centres in the Indian administrative set-up at risk.
The Central government cites its responsibility for defence, foreign affairs, among others for greater fiscal space, but the states have equally important responsibilities such as maintaining internal security, education, food, which are of critical importance for orderly socio-economic development of the country.
