15th Finance Commission Formula Retained in Union Budget Signals No Shift
15th Finance Commission recommendations continue to define the financial relationship between the Union and the States, as reflected in the Union Budget 2026–27. The latest Budget indicates that the Union government has chosen to retain the existing framework governing tax devolution, despite repeated concerns raised by several States over fiscal stress and shrinking financial autonomy.
The Budget confirms acceptance of the 16th Finance Commission’s proposal to maintain States’ share in shareable Union taxes and duties at 41% for the next five years. This mirrors the arrangement followed during the previous five-year period under the 15th Finance Commission. While the percentage appears stable on paper, States argue that the effective flow of funds tells a different story.
Over the years, the increasing reliance on cesses and surcharges by the Union government has significantly reduced the actual revenue reaching States. Since these collections are excluded from the divisible pool, the effective share of funds transferred to States has remained between 30% and 33%, well below the headline figure of 41%. This gap has become a major point of contention, particularly for fiscally disciplined States that depend heavily on predictable transfers.
The continuation of this structure suggests that the Union government is not inclined to revisit the size of the divisible pool or alter the balance of fiscal power between the Centre and States in the near future.
15th Finance Commission Approach Deepens State-Level Financial Pressure
The persistence of the 15th Finance Commission framework comes at a time when States are being asked to shoulder greater responsibility for implementing Centrally Sponsored Schemes. Several welfare and employment programmes now require higher State contributions, even as the Centre retains control over design, implementation guidelines and fund release conditions.
Recent restructuring of employment and livelihood schemes has further intensified these pressures. States are expected to allocate larger shares of their own resources while adhering to centrally prescribed norms. In many cases, fund releases are linked to compliance with policy conditions, leaving States with limited flexibility to tailor programmes to local needs.
This model has raised concerns about fiscal autonomy. States argue that while responsibilities are being decentralised, revenue powers remain concentrated at the Centre. As a result, States are forced to borrow more to meet expenditure commitments, adding to long-term debt burdens.
Rising use of cesses weakens the spirit of federal sharing
These developments have also contributed to growing regional unease. Southern and eastern States, in particular, have voiced apprehensions that the current fiscal structure disadvantages them despite strong revenue mobilisation and better social indicators. The continuation of the same tax-sharing formula risks intensifying regional narratives that question equity in fiscal federalism.
At a broader level, the Budget reveals a disconnect between long-term economic goals and immediate fiscal decisions. While recent policy documents have highlighted the need for large-scale structural reforms to strengthen manufacturing, exports and resilience to global economic shocks, the Budget does not clearly outline pathways or allocations to achieve these objectives.
There is also a noticeable departure from past Budget strategies. Traditionally, Union Budgets have included prominent announcements aimed at stimulating consumption or offering targeted relief. This time, the emphasis remained firmly on fiscal consolidation, despite projections of healthy economic growth in the coming year.
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Equally striking is the absence of major State-specific initiatives, even as several States prepare for Assembly elections. Unlike previous years, when poll-bound States received focused attention, the current Budget maintains a uniform approach, reinforcing its image as fiscally conservative rather than politically accommodative.
The overall message from the Budget appears clear: stability and continuity have been prioritised over course correction. By retaining the 15th Finance Commission model and resisting calls to expand the divisible pool, the Union government has signalled confidence in its existing fiscal strategy, even as States continue to press for reform. Also Read: NGT Asks Tamil Nadu to Expand Proven Waste Control Model Across Public Events
Conclusion
The continued reliance on the 15th Finance Commission framework underscores the Centre’s preference for fiscal continuity over structural change. While stability has its merits, unresolved concerns over State finances and autonomy remain central to the evolving debate on India’s federal fiscal balance.
