Is 16th Finance Commission offering southern states a fair deal?

Karnataka, once vocal about unfair treatment, gains relief through revised devolution criteria

Four out of five major southern States — Karnataka, Kerala, Tamil Nadu, and Telangana — are currently ruled by Opposition parties. The ruling party in Andhra Pradesh is a Bharatiya Janata Party (BJP) ally at the Centre. Southern States have often complained of unfair treatment by an ultra-centralising Narendra Modi government — Centrally-controlled Governors, unfair treatment in case of Centrally-sponsored schemes (CSSs), and manoeuvring the XV Finance Commission (XVFC) to reduce their share in taxes.

The sixteenth Finance Commission (XVIFC) recommendations, to be implemented from 2026-2027, make a significant departure in most matters which Finance Commissions deal with — share in Central taxes, revenue deficit grants, States’ autonomy over loans, etc.

Has the XVIFC done ‘justice’ to southern States? Will its recommendations soothe their ruffled feathers?

Share in Central taxes

The Finance Commission’s primary job is to recommend the States’ share in Central taxes, which is substantial. In 2024-2025, the States received Rs 12.86 trillion in Central taxes (of total transfers of Rs 22.26 trillion the Union government made, including loans), amounting to nearly 58% of all transfers. Budget 2026-2027 proposes to transfer Rs 15.26 trillion in Central taxes to States.

The southern States, most vociferously Karnataka, had complained of their share being unfairly reduced by the XVFC. Karnataka had 4.713% share in the Central taxes devolution pool in the XIVFC. This was reduced to 3.647% by the XVFC. A one percent loss of share meant a shortfall of Rs 128.6 billion in 2024-2025. Kerala’s share was reduced to 1.925% by the XVFC from 2.5% in the XIVFC period. Telangana’s share came down from 2.437% to 2.102%. Andhra Pradesh’s share had also come down from 4.305% to 4.047%. Tamil Nadu’s share remained about the same (4.079% in XVFC against 4.023% in XIVFC).

The XVIFC has retained the overall States’ share at 41% of the devolution pool of Central taxes, but made some significant departures in factors/weights used for determining each State’s share. It re-introduced ‘democratic performance’ as a criterion (with 10% weightage) to reward southern States which have done well in controlling population and introduced a new criterion of ‘contribution to GDP’ (with 10% weightage) in place of fiscal efficiency, which had 2.5% weightage in the XVFC.

The net effect of these adjustments in horizontal the devolution criterion is that Karnataka’s share has gone up to 4.131% (recovering about half of the loss in the XVFC), Kerala’s to 2.382% (making-up bulk of its loss), Telangana’s to 2.174% (a marginal recovery), and Andhra Pradesh to 4.217% (a substantial recovery). Tamil Nadu’s share inched up a little further to 4.097%.

All this has translated into a much higher share of the southern States in Central taxes in the 2026-2027 estimates. While the overall increase in the share in Central taxes in the 2026-2027 Budget estimates (over the 2025-2026 revised estimates) is 9.57%, Karnataka’s share has gone up by 24.11%, Kerala’s by 35.58%, Andhra Pradesh’s by 14.17%, Telangana’s by 13.32%, and Tamil Nadu’s by 10.05%.

The southern States can feel relieved from the XVIFC’s recommendations for the devolution of Central taxes to States. They may continue their battle in the XVIIFC, seeking to raise their share to at least equal what was recommended in the XIVFC.

Revenue deficit grants junked

The Finance Commissions have been recommending revenue deficit grants (RDGs) for States which were left with an uncovered gap between their resources and expenditure requirements. The XVFC had recommended a total RDGs of Rs 2.95 trillion.

Telangana, Karnataka, and Tamil Nadu have performed well in fiscal management and do not have such revenue gaps. Accordingly, the XVFC did not recommend any RDGs for Telangana, and recommended small grants of Rs 16.31 billion for Karnataka and Rs 22.04 billion for Tamil Nadu. Their share of the RDGs was only 1.3%.

The XVIFC has, in a welcome manner, discontinued the RDGs. The RDGs never succeeded in balancing the resources and needs of deficit States. Telangana, Karnataka, and Tamil Nadu will not rue the demise of the RDGs.

For many years now, Kerala and Andhra Pradesh have been fiscally stressed States. The XVFC had recommended large RDGs, Rs 371.99 billion for Kerala and Rs 304.97 billion for Andhra Pradesh. Kerala may consequently feel the pressure, while Andhra Pradesh will most likely be compensated by its ally at the Centre.

Other grants

The XVIFC has recommended only disaster relief and local bodies grants, doing away with sector-specific and State-specific grants.

The XVIFC disaster-related grant package is standard stuff and makes no change which will have any particularly adverse or favourable impact on southern States. The local bodies’ grants have been formulated in a slightly more performance-driven and complicated manner.

The southern States have been leaders in strengthening and managing municipal and rural local bodies. They might come out on top and certainly claim their full share of these grants.

Control over borrowings

Though not a core part of its terms of reference, the XVIFC recommended greater monitoring and a superintending role for the Union government over State governments in matters of fiscal responsibility, borrowings, debt management, and the CSSs.

The XVIFC has leaned on the Union government’s side in these matters of crucial Centre-States fiscal ties. The southern States would need to remain quite vigilant when these recommendations are examined by the Centre for implementation, and protect their autonomy and interests.

Subhash Chandra Garg is former Finance & Economic Affairs Secretary, and author of ‘The Ten Trillion Dream Dented’, ‘Commentary on Budget 2025-2026’, and ‘We Also Make Policy’.

(Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.)