16th Finance Commission Tax Devolution Formula – UP Bihar lose, South States gain| Dr. Mrunal Patel

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Timestamps
00:00 – Budget hides Finance Commission
00:40 – Vertical devolution at 41%
01:20 – Horizontal formula- 15th vs 16th FC
02:40 – Income Distance 42.5%
04:10 – Population weight increased
05:40 – Demographic Performance 10%
07:00 – Area & Forest criteria changes
08:30 – New GDP Contribution criterion
10:20 – Southern & industrial states gain
12:00 – Northern states share drop
13:40 – Top 5 states still same
15:10 – Tax Effort criterion removed
16:20 – Grants for local bodies
17:50 – Why UTs not included
19:10 – Unacademy courses unlocked
21:40 – Annual Economic Win26

In this detailed lecture, renowned UPSC Economy expert Dr. Mrunal Patel breaks down the 16th Finance Commission’s key recommendations on tax devolution, tabled with the Union Budget 2026. The vertical devolution remains fixed at 41% of the divisible pool of central taxes to states (same as 15th FC led by NK Singh and continued under Arvind Panagariya’s 16th FC). However, major changes in the horizontal devolution formula have shifted allocations.

Dr. Mrunal explains why populous poorer states like Uttar Pradesh, Bihar, Madhya Pradesh, Rajasthan etc. will see a relative decrease in their percentage share, while coastal-industrial states like Gujarat, Maharashtra, Karnataka, Andhra Pradesh, Tamil Nadu gain more. The lecture covers:

– What is vertical vs horizontal tax devolution?
– Constitutional basis (Article 280 & 281)
– Why Finance Commission reports get buried under Budget news
– Detailed comparison of 15th vs 16th FC criteria and weights

Key changes in horizontal devolution criteria:
– Income Distance (poverty proxy / per capita GSDP distance): Reduced from 45% to 42.5%
– Population (2011 Census): Increased from 15% to 17.5%
– Demographic Performance (reward for population control / lower TFR): Reduced from 12.5% to 10%
– Area: Reduced from 15% to 10%
– Forest & Ecology: Retained at 10%
– New criterion: Contribution to GDP (efficiency / state’s share in national GDP): Introduced at 10%
– Tax Effort: Completely removed (previously 2.5%)

This shift rewards efficiency and economic contribution, addressing long-standing demands from southern and industrialized states (IT, pharma, auto hubs in Tamil Nadu, Karnataka, Telangana, Andhra). Northern & central states with higher poverty, population and area lose relative share, though top recipients remain UP, Bihar, MP, West Bengal, Maharashtra due to combined population-area-poverty factors.

Dr. Mrunal also discusses:
– Grants-in-aid: No revenue deficit grants recommended; focus on local bodies (panchayats & municipalities), disaster management
– Additional 1.4 lakh crore grants announced in Budget for local bodies
– Why Union Territories (Delhi, Puducherry, J&K) are not in state devolution tables
– Remaining 59% stays with Centre; schemes & CSS decided by Finance Ministry

Perfect for UPSC CSE, SSC-CGL, State PSC, Banking (IBPS, RBI), CAPF, CDS, ACIO, APFC aspirants preparing Economy, Indian Polity, Federalism & Current Affairs. Understand fiscal federalism, north-south divide in resource sharing, and why southern states complain about population control penalty & demand rewards for performance.

This is part of Dr. Mrunal’s ongoing current affairs & budget analysis series. For full structured courses, annual Economic Current Affairs mega series (6-8 lectures with PPT handouts), mock tests & materials – all paid Unacademy courses are unlocked for limited time.

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