The Centre is preparing for a tighter fiscal balancing act as the 16th Finance Commission’s recommendations come into force from April 1, 2026, significantly raising the flow of funds to states and local bodies.
Expenditure secretary V. Vualnam said the government will need to be cautious to ensure that fiscal deficit targets and the debt glide path remain on track, given the scale of devolution involved.
“The government has accepted (the recommendations), and we will have to tread very carefully so that our fiscal targets, our glide path and all are abided by,” Vualnam said in a post-Budget interview with PTI.
The 16th Finance Commission, chaired by Arvind Panagariya, has recommended that states receive 41 per cent of the Centre’s gross tax revenue for a five-year period starting 2026-27.
It has also proposed doubling grants to local bodies while discontinuing post-devolution revenue deficit grants to states.
According to Vualnam, states’ share in central tax collections alone would amount to around Rs 14 lakh crore under the recommended devolution formula.
When grants and transfers under Centrally Sponsored Schemes and Central Sector schemes are added, the total outgo from the Centre to states would cross Rs 25 lakh crore.
This expansion in transfers comes at a time when the Centre is continuing its fiscal consolidation programme.
Finance minister Nirmala Sitharaman, in the Union Budget presented on Sunday, pegged the fiscal deficit for 2026-27 at 4.3 per cent of GDP, marginally lower than the revised estimate of 4.4 per cent for 2025-26.
The government has also projected a gradual decline in public debt. The debt-to-GDP ratio is estimated at 55.6 per cent in Budget Estimates for 2026-27, compared with 56.1 per cent in the revised estimates for 2025-26.
Sitharaman said a lower debt burden would reduce interest costs and create fiscal space for priority spending. The Centre has set a medium-term goal of bringing the debt-to-GDP ratio down to 50±1 per cent by 2030-31.
The Finance Commission has also recommended total grants of Rs 7,91,493 crore for duly constituted Rural Local Bodies and Urban Local Bodies for the period from 2026-27 to 2030-31, reinforcing the shift towards greater fiscal empowerment at the grassroots level.