The much-awaited 16th Finance Commission (FC) report was tabled in Parliament on Sunday. The report retained the 41% vertical devolution while making some minor, but important, changes in the horizontal devolution. The first impression is that, unlike the previous Commission, this FC has tried for a balance between equity and efficiency. There are two major changes that this FC has brought. One is on the criteria for horizontal devolution and another is discontinuation of revenue deficit grants.
In the horizontal devolution, by including a new criterion of ‘contribution to GDP’, which the report says is ‘introducing in recognition of India’s growth ambition’, the FC tried to partially address the concerns of the fast-growing states. With a weightage of 10% to this criteria, the report suggests that it captures all forms of efficiency both on spending and fiscal rectitude.
On revenue deficit grants, in chapter-9, the report........

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