Former RBI Governor C. Rangarajan. File
| Photo Credit: M. VEDHAN
The Sixteenth Finance Commission retains the share of States in the divisible pool at 41%, but it makes no recommendation on non-shareable cess and surcharge, which has been a concern for all States, C. Rangarajan, Former Chairman, Economic Advisory Council to the Prime Minister & Former Governor, RBI, and Chairman, Madras School of Economics, said.
Speaking at a one-day conference on the report of the Sixteenth Finance Commission that was organised 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 Centre and States, so that States would agree to a smaller share provided the Centre agreed to merge a large part of the cesses and surcharges in the regular taxes.”
“It would have been better if the commission at least pointed out to the Centre that the steep increases in cesses and surcharges is not warranted and is not in the spirit of the Constitution,” he added.
Mr. Rangarajan then pointed out that the Sixteenth Finance Commission discontinued revenue deficit grants and sector specific grants and this will reduce the flow of resources from the centre to the States. “In the horizontal distribution, a new variable contribution to GDP has been added. This is not the variable contribution to total taxes of the Centre as demanded by several rich States. Using square root of States share in GDP reduces the impact of this variable,” he added.
“There are difficulties in estimating revenue deficit grant but the Sixteenth Finance Commission took the short cut to dropping it altogether. Normatively determined revenue gap grants and appropriate equalisation grants have a place in federal structure,” Mr. Rangarajan explained.
N.R. Bhanumurthy, director of MSE, said that there are some downside risks. “Increasing share of cesses and surcharges – Finance Commission could have set some limits on extent and use,” he said. He also said that under population criteria, missing the migration trends could go against some States.
Published – February 25, 2026 05:34 am IST
