South and west states win as 16th Finance Commission rewards GDP growth
Karnataka, Kerala lead gains; populous northern states see shares decline in FY26-31 devolution share
By Samreen Wani
Last Updated: Feb 02, 2026, 19:13 IST3 min
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Southern and western states emerged as the primary beneficiaries after the government accepted the 16th Finance Commission’s recommendation to retain the vertical devolution share at 41 percent.
Announcing the acceptance in her Budget speech, Finance Minister Nirmala Sitharaman allocated ₹1.4 lakh crore to states for FY 2026–27 as Finance Commission grants, including funds for rural and urban local bodies and disaster management.
However, the revised horizontal devolution framework introduces a 10 percent weight for GDP contribution to recognise and incentivise states’ roles in driving the national economy.
As the formula changes produced clear regional patterns, several northern and northeastern states saw their shares decline.
With a 0.48 percentage point jump from the previous cycle, Karnataka secured the largest gains, bringing its total share of the divisible tax pool to 4.1 percent for the period 2026–31.
Kerala followed closely with 2.4 percent (up 0.46 percentage points), while Gujarat gained 0.28 percentage points to reach 3.8 percent. Haryana and Punjab also experienced significant increases of 0.27 and 0.19 percentage points, respectively, bringing their shares to 1.4 and 2.0 percent.
Maharashtra, despite being among the largest contributors to national GDP, saw a moderate gain of 0.12 percentage points, securing a 6.4 percent share. Andhra Pradesh increased its share to 4.2 percent (up 0.17 percentage points), Tamil Nadu did so by 0.02 percentage points, while Assam gained 0.13 percentage points to reach 3.3 percent.
Among smaller states, Himachal Pradesh, Uttarakhand and Mizoram recorded modest gains.
Madhya Pradesh, despite maintaining a significant 7.3 percent share, saw a decline of 0.50 percentage points—the steepest reduction among all states. Uttar Pradesh, while retaining the largest share at 17.6 percent, experienced a 0.32 percentage point decrease.
West Bengal’s share dropped to 7.2 percent (down 0.31 percentage points), while Bihar, which holds the second-largest share at 9.9 percent, declined by 0.11 percentage points. Other major states experiencing reductions included Rajasthan, Odisha, and Chhattisgarh.
Several northeastern states also faced declines: Arunachal Pradesh saw its share fall by 0.40 percentage points to 1.4 percent, while Meghalaya, Manipur, Nagaland, and Tripura experienced smaller reductions ranging from 0.07 to 0.14 percentage points.
Tamil Nadu and Uttarakhand saw minimal changes, with gains of just 0.02 percentage points each, reaching 4.1 and 1.1 percent respectively. Goa and Sikkim experienced marginal declines of 0.02 and 0.05 percentage points, maintaining shares of 0.4 and 0.3 percent.
The 16th Finance Commission has added GDP contribution as a devolution criterion, carrying a 10 percent weight. This marks a departure from purely equity-based considerations and recognises states’ contributions to national economic growth.
While maintaining five established criteria from previous commissions—population, demography, area, forest cover, and per-capita GSDP-distance—the 16th Finance Commission made notable adjustments.
The demographic performance criterion saw its weight reduced from 12.5 percent to 10 percent, signalling a gradual phase-out of rewards for slower population growth.
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“As India travels on the growth path, it faces the risk of aging before it becomes rich, which could adversely impact the country’s growth prospects,” the report noted, justifying the reduced emphasis on this criterion.
Despite the new efficiency focus, equity concerns retain primacy through the per-capita GSDP-distance criterion, which carries the highest weight at 42.5 percent, lower than the 45 percent share under the 15th Finance Commission. This ensures states with lower fiscal capacity receive proportionately more funds.
The Commission refined this criterion by benchmarking against the average per capita GSDP of the top three states (excluding Goa and Sikkim) rather than just the highest, addressing narrow gaps among high-performing states. Population, measured using 2011 Census data, carries a 17.5 percent weight.
First Published: Feb 02, 2026, 19:13
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