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3 Feb 2026·Source: The Hindu
4 min
EconomyPolity & GovernanceNEWS

Southern States' Increased Fund Share Offers Minimal Relief to Tamil Nadu

Tamil Nadu sees marginal fund increase despite southern states' overall gains.

Southern States' Increased Fund Share Offers Minimal Relief to Tamil Nadu

Photo by Jakub Żerdzicki

Despite southern states collectively receiving a higher share under the 16th Finance Commission, Tamil Nadu's increase is marginal, rising from 4.079% to 4.097% (a 0.44% increase). Karnataka and Kerala saw double-digit increases of 13.27% and 23.74%, respectively. Experts say Tamil Nadu gained virtually nothing extra, attributing it to the inclusion of GDP contribution as a criterion. The removal of tax and fiscal effort criteria also impacted Tamil Nadu's share. Kerala's rise is second only to Haryana's 24.52% at the all-India level. The commission acknowledged that Andhra Pradesh, Telangana and Tamil Nadu used information technology to streamline beneficiary listing for subsidies, leading to savings. While southern states agreed on many issues, they differed on revenue deficit grants, which the 16th FC opposed.

Key Facts

1.

Tamil Nadu's fund share increase: 0.44%

2.

Karnataka's fund share increase: 13.27%

3.

Kerala's fund share increase: 23.74%

4.

Tamil Nadu subsidy: ₹78,453 crore (2023-24)

UPSC Exam Angles

1.

GS Paper II: Functions and responsibilities of the Union and the States, issues and challenges pertaining to the federal structure, devolution of powers and finances up to local levels and challenges therein.

2.

GS Paper III: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

3.

Potential question types: Statement-based MCQs, analytical mains questions on fiscal federalism.

Visual Insights

More Information

Background

The Finance Commission is a constitutional body established under Article 280 of the Indian Constitution. It is responsible for recommending the distribution of tax revenues between the Union and the States, and among the States themselves. The recommendations of the Finance Commission are crucial for maintaining fiscal federalism in India. The Finance Commission's recommendations are generally implemented for a period of five years. The criteria used by the commission for determining the share of each state have evolved over time. Earlier commissions focused on factors like population, area, and fiscal discipline. However, more recent commissions have also considered factors like demographic performance, income distance, and tax effort. The Goods and Services Tax (GST), introduced in 2017, has significantly impacted the fiscal relations between the Union and the States. GST has altered the revenue base of both the Union and the States, necessitating adjustments in the Finance Commission's recommendations to ensure equitable distribution of resources. The commission also addresses issues related to revenue deficit grants to states.

Latest Developments

The 16th Finance Commission is currently in the process of formulating its recommendations for the period 2026-2031. The commission is expected to address key issues such as the impact of the COVID-19 pandemic on state finances, the need for greater fiscal autonomy for states, and the promotion of cooperative federalism. Several states have been advocating for a greater share of central taxes and a more transparent and predictable formula for devolution. The southern states, in particular, have raised concerns about the use of demographic criteria in determining their share, arguing that it penalizes states that have made progress in controlling population growth. The commission is also likely to consider the impact of various centrally sponsored schemes on state finances and the need for greater flexibility in the implementation of these schemes. The recommendations of the 16th Finance Commission will have a significant impact on the fiscal health of both the Union and the States and will shape the future of fiscal federalism in India.

Frequently Asked Questions

1. What is the Finance Commission and why is it important for UPSC Prelims?

The Finance Commission, established under Article 280 of the Indian Constitution, recommends the distribution of tax revenues between the Union and the States. It is crucial for understanding fiscal federalism and center-state financial relations, frequently tested in the Prelims.

Exam Tip

Remember Article 280 and the Finance Commission's role in fiscal federalism.

2. What are the key facts regarding the 16th Finance Commission's impact on Tamil Nadu's fund share?

Tamil Nadu's fund share increased marginally from 4.079% to 4.097%, a 0.44% increase. This is significantly less compared to Karnataka's 13.27% and Kerala's 23.74% increase.

  • •Tamil Nadu's fund share increase: 0.44%
  • •Karnataka's fund share increase: 13.27%
  • •Kerala's fund share increase: 23.74%

Exam Tip

Focus on the percentage changes for different states.

3. Why is Tamil Nadu's fund share increase so marginal compared to other southern states?

According to experts, the inclusion of GDP contribution as a criterion and the removal of tax and fiscal effort criteria impacted Tamil Nadu's share. This means that the state's economic output was given more weight, while its efforts in tax collection were given less.

4. How does the Finance Commission's recommendations impact fiscal federalism in India?

The Finance Commission's recommendations determine the distribution of tax revenues between the Union and the States, and among the States themselves. This directly impacts the financial autonomy and resource availability of states, shaping the dynamics of fiscal federalism.

5. What is the significance of the 16th Finance Commission in the current economic scenario?

The 16th Finance Commission is formulating recommendations for 2026-2031, addressing the impact of COVID-19 on state finances, the need for greater fiscal autonomy for states, and the promotion of cooperative federalism. These recommendations will shape the financial landscape of Indian states for the next five years.

6. What role does Information Technology play in subsidy management, as highlighted by the Finance Commission?

The commission acknowledged that Andhra Pradesh, Telangana, and Tamil Nadu used information technology to streamline beneficiary listing for subsidies, leading to savings. This highlights the importance of IT in improving efficiency and reducing leakages in government programs.

7. What are the potential implications of Tamil Nadu's marginal fund increase on its development programs?

A marginal increase in funds may limit the state's ability to invest in new development programs or expand existing ones. This could impact sectors like infrastructure, education, and healthcare, potentially slowing down the pace of development.

8. What are the arguments that Tamil Nadu could present to the Finance Commission for a larger share of central taxes in the future?

Tamil Nadu could argue for a greater weightage to be given to factors such as its progress in social development indicators, its contribution to the national economy beyond GDP, and its efforts in promoting sustainable development. The state could also highlight its specific needs and challenges.

9. Why is this news about the Finance Commission relevant to current affairs?

The distribution of central taxes among states is a recurring issue, especially with the formation of a new Finance Commission. This news highlights the ongoing debates and concerns regarding fiscal justice and resource allocation among states, making it relevant for current affairs discussions.

10. What is Article 280 of the Indian Constitution?

Article 280 of the Indian Constitution provides for the establishment of a Finance Commission to recommend the distribution of tax revenues between the Union and the States. It is a crucial article for understanding fiscal federalism.

Practice Questions (MCQs)

1. Consider the following statements regarding the 16th Finance Commission: 1. The 16th Finance Commission opposed revenue deficit grants. 2. The Commission acknowledged the use of information technology by Andhra Pradesh, Telangana, and Tamil Nadu in streamlining beneficiary listing for subsidies. 3. Karnataka experienced a higher percentage increase in fund share compared to Kerala under the 16th Finance Commission. Which of the statements given above is/are correct?

  • A.1 and 2 only
  • B.2 only
  • C.1 and 3 only
  • D.1, 2 and 3
Show Answer

Answer: A

Statement 1 is CORRECT: The 16th Finance Commission opposed revenue deficit grants. Statement 2 is CORRECT: The commission acknowledged that Andhra Pradesh, Telangana and Tamil Nadu used information technology to streamline beneficiary listing for subsidies, leading to savings. Statement 3 is INCORRECT: According to the news summary, Karnataka saw a 13.27% increase, while Kerala saw a 23.74% increase, making Kerala's increase higher.

2. Which of the following factors contributed to the marginal increase in Tamil Nadu's fund share under the 16th Finance Commission? 1. Inclusion of GDP contribution as a criterion. 2. Removal of tax and fiscal effort criteria. 3. Increased allocation for revenue deficit grants. Select the correct answer using the code given below:

  • A.1 only
  • B.2 only
  • C.1 and 2 only
  • D.1, 2 and 3
Show Answer

Answer: C

The news summary explicitly states that the inclusion of GDP contribution as a criterion and the removal of tax and fiscal effort criteria impacted Tamil Nadu's share. It also mentions that the 16th FC opposed revenue deficit grants, so increased allocation is incorrect.

3. Which Article of the Indian Constitution deals with the establishment of the Finance Commission?

  • A.Article 268
  • B.Article 270
  • C.Article 280
  • D.Article 360
Show Answer

Answer: C

Article 280 of the Indian Constitution provides for the establishment of a Finance Commission to recommend the distribution of tax revenues between the Union and the States.

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