Fiscal federalism, efficiency versus equity concerns

The article critically analyzes the 16th Finance Commission's (FC-16) report, highlighting its significant departure from previous commissions' approaches to fiscal transfers. While retaining the vertical devolution of central taxes to states at 41%, FC-16 fundamentally re-engineers the structure of grants-in-aid, drastically reducing their share and eliminating Revenue Deficit Grants (RDGs), sector-specific, and State-specific grants. This shift, prioritizing efficiency and performance, raises serious concerns about equity and the constitutional intent of equalizing transfers, particularly for fiscally stressed or structurally disadvantaged states. The article also points out the asymmetry in the Commission's stance on state fiscal discipline versus the Union's use of cesses and surcharges, suggesting a potential reinforcement of vertical imbalance rather than correction.