India’s most indebted states press 16th Finance Commission for relief, larger share of Central revenue

The 16th Finance Commission, chaired by economist Arvind Panagariya, is reviewing submissions from states and central departments as it prepares recommendations for 2026-31. The commission is set to submit its report on 31 October.

The 15th Finance Commission’s criteria for sharing central tax revenues with states relies on parameters such as population, geographical area, forest cover and ecology, per capita GDP disparities, tax and fiscal efforts, and demographic performance.

Under this, states receive 41% of the divisible pool of central taxes, lower than the 14th Finance Commission’s 42% to account for the creation of the Union Territories of Jammu & Kashmir and Ladakh.

Apart from this devolution, the Finance Commission recommends a state revenue deficit grant to bridge the gap between a state’s projected revenue and its expenditure after accounting for its share of central taxes.

Released in installments by the Union finance ministry, these grants provide crucial support to financially weaker states in meeting their revenue shortfalls.

Punjab’s demands from the 16th Finance Commission

Punjab has sought a ₹75,000-crore development grant, half of which is tied to capital formation as part of the state’s roadmap to reduce its debt-to-gross state domestic product (GSDP) ratio by 1% annually.

Punjab’s debt-to-GSDP ratio in 2025-26 is projected to be 44.5%, as per the latest Union Budget estimates. Jammu & Kashmir (51%), Nagaland (47.8%), and Arunachal Pradesh (45.9%) debt-to-GSDP ratios. Himachal Pradesh and West Bengal are projected to have debt-to-GSDP ratios of 40.5% and 38%, respectively, in 2025-26.

The agrarian state has also sought ₹18,000 crore for crop diversification, ₹5,000 crore for mitigating crop stubble burning, and ₹8,800 crore to tackle drug abuse and narco-terrorism, covering law enforcement, forensic modernization, rehabilitation, prevention, and public awareness.

According to the state’s presentation to the 16th Finance Commission, Punjab has also sought ₹6,000 crore for industry revitalisation, including infrastructure development and special incentives to attract new investment, particularly for border and backward areas.

In terms of local bodies, Punjab has recommended a higher devolution to local bodies, proposing ₹19,426 crore for rural and urban entities.

The flood-hit state has also suggested revising the Centre-state disaster fund sharing ratio from 75:25 to 90:10, and greater flexibility in the use of disaster funds to suit Punjab’s high vulnerability to floods and seismic events.

Himachal Pradesh

Himachal Pradesh’s submissions to the 16th Finance Commission focus on ecological and disaster-related vulnerabilities.

The state, located in the western Himalayan region, has sought a minimum annual revenue deficit grant of ₹10,000 crore, and the creation of a ₹50,000 crore Green Fund for hill states to compensate them for ecological services, an official said, requesting anonymity.

“Highlighting repeated natural disasters over the past three years, which caused damages exceeding ₹15,000 crore, the state’s chief minister (in his communication with the 16th Finance Commission) has noted the Supreme Court’s July 2025 observation that revenues cannot come at the cost of ecology,” the official said. “The state has also sought greater weight for forest and ecology criteria, urging that snow-covered cold deserts and areas above the tree line be recognized alongside dense forests.”

On disaster relief, Himachal Pradesh argued that the disaster risk index (DRI) created by the 15th Finance Commission underestimated the vulnerabilities of Himalayan states. It called for a separate DRI for hill states taking into account hazards such as landslides, avalanches, cloudbursts, forest fires, and floods caused by glacial lake outbursts.

West Bengal

West Bengal has pushed for raising the weight of income distance to 50% from 45% in determining tax devolution. Income distance is the gap between a state’s per capita income and that of India’s richest state. Poorer states with larger income distance get a higher share of central taxes,

West Bengal has proposed introducing urbanisation as a criterion with a 7.5% weight, and urged that 10% of federal allocations be linked to a state’s population adjusted for the share meant for scheduled caste (SC) and scheduled tribe (ST) people.

“The state has also flagged concerns beyond the Finance Commission’s mandate, including delays in central funding and challenges with centrally sponsored schemes,” said a second official, who too didn’t want to be identified.

“The state has sought revisions in the criteria and their weight for horizontal devolution, which currently factors in income distance, population, area, forest cover, demographic performance, and tax effort,” the official added.

Spokespersons of Punjab, Himachal Pradesh, and West Bengal finance ministries didn’t respond to emailed queries.

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