Former RBI Governor C. Rangarajan. File | Photo credit: M.VEDHAN
The 16th Finance Commission keeps states’ share in the divisible fund at 41% but makes no recommendation on non-divisible relief and surcharge, which is a concern for all states, said C. Rangarajan, former chairman of the Prime Minister’s Economic Advisory Council and ex-governor, RBI and chairman, Madras School of Economics.
Speaking at a one-day conference on the Sixteenth Finance Commission report, organized by the Madras Institute of Development Studies (MIDS) in association with the Madras School of Economics (MSE), Mr. Rangarajan said, “This is unfortunate. The Sixteenth Finance Commission recommended a ‘grand bargain’ between the Center and the states for states to agree to a smaller amalgamation surcharge on the assumption that the states would agree to a smaller amalgamation surcharge.”
“It would be better if the commission at least warned the center that the steep increase in price lists and surcharges is not justified and is not in the spirit of the constitution,” he added.
Mr. Rangarajan then pointed out that the 16th Finance Commission has ended revenue deficit grants and sector-specific grants, which will reduce the flow of resources from the Center to the states. “A new variable contribution to GDP has been added in the horizontal division. It is not a variable contribution to the Centre’s total taxes as demanded by several rich states. Using the square root of the states’ share in GDP reduces the impact of this variable,” he added.
“There are difficulties in estimating the revenue gap grant, but the Sixteenth Finance Commission has taken a shortcut to abolish it altogether. Statutory revenue gap grants and appropriate compensatory grants have their place in the federal structure,” explained Mr. Rangarajan.
NR Bhanumurthy, director of MSE, said there are some downside risks. “The growing share of cesses and mark-ups – the Finance Commission could have set some limits on the scope and use,” he said. He also said that based on population criteria, missing migration trends could work against some states.
Published – 25 Feb 2026 05:34 IST
