The government is likely to ask the next Finance Commission to consider a higher weight for the human development index (HDI) and sustainable development goals (SDGs) while recommending the distribution of resources among states. It may also ask the commission to weave in climate goals in its formula.
The government is currently finalising the terms of reference for the 16th Finance Commission, which is likely to be set up shortly. The commission may also be asked to look at the conditions attached to fiscal transfers to urban and rural local bodies, to ensure that the funds are effectively utilised, a senior official aware of the discussions told ET.
Terms of reference ‘soon’
“There will be continuity from the last (15th) Finance Commission,” the person said. “It can be asked to look at (whether) more weight can be given to the human development index and sustainable development goals while determining the revenue share.”
The 15th Finance Commission gave 12.5% weight to demographic performance, 45% to income, 15% each to population and area, 10% to forest and ecology, and 2.5% to tax and fiscal efforts.
The terms of reference will likely be notified “soon”, the official added.
The Finance Commission is a constitutional body that determines the method and formula for distributing tax proceeds among the Centre and states. It suggests distribution of taxes and grants and works based on the terms of reference set by the finance ministry for a five-year period. The recommendation of the 16th Finance Commission will be applicable for the period from April 2026 to March 2031.
The government earlier this month appointed Ritwik Pandey, a 1998 batch IAS officer of the Karnataka cadre, as an officer on special duty at the advance cell of the Finance Commission.
The terms of reference could include consideration of climate issues while deciding distribution of funds among states keeping in view India’s commitment to climate financing and to prepare states and cities to tackle future adverse weather conditions and natural disasters, the official said.
The 15th Finance Commission had allocated ₹54,770 crore under the National Disaster Relief Fund and ₹1.28 lakh crore for state disaster relief funds. The Centre’s share in state disaster relief funds was ₹98,080 crore.
Improving the financial health of municipal bodies is part of the government’s pending agenda.
The Reserve Bank of India, the Department of Expenditure and state finance commissions have repeatedly flagged inefficient fund utilisation as well as poor accounts and record keeping by some municipal bodies.
“The commission could be asked to look at conditions-based transfer to make fund utilisation by local bodies effective and transparent,” the official added.
The total central grant to local governments is estimated to be ₹4.36 lakh crore for the 15th Finance Commission period (FY22-FY26), of which ₹2.36 lakh crore is earmarked for rural local bodies and ₹1.21 lakh crore for urban local bodies.
Another ₹70,051 crore is for health grants through local governments.
