More than 22 of India’s 28 states have asked the 16th Finance Commission to raise their share of the divisible tax pool from the current 41 per cent to 50 per cent, Commission chairman Arvind Panagariya said on Wednesday.
The Commission visited Lucknow as part of its ongoing consultations with state governments across the country. Addressing the media, Panagariya noted that states such as Uttar Pradesh have joined the majority in seeking a greater share of central tax revenues.
“At present, states receive 41 per cent of the total divisible tax revenue, while the Centre retains 59 per cent... UP, along with many others, has recommended increasing the state share to 50 per cent,” said Panagariya, according to a report by PTI.
Commission yet to confirm recommendation
Despite the widespread demand, Panagariya did not confirm whether the Commission would include this proposal in its final recommendations. He did, however, note that past Finance Commissions’ recommendations have generally been accepted by the Centre without changes.
The 16th Finance Commission was constituted on 31 December 2023 under Article 280 of the Constitution. It has been tasked with recommending how tax revenues should be distributed between the Centre and the states for the five-year period beginning 1 April 2026. The Commission is expected to submit its report by 31 October 2025, covering fiscal years 2026–27 to 2030–31.
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States carry heavier spending responsibilities
State governments account for over 60 per cent of total public expenditure in the country, with a significant focus on social infrastructure such as healthcare, education, and law and order. In contrast, the Union government primarily allocates spending to physical infrastructure.
Since the rollout of the Goods and Services Tax (GST) in July 2017, states have experienced a decline in their autonomy over revenue collection. Their capacity to raise funds independently has been curtailed, increasing their dependence on central transfers.
A related concern is the Union government’s increased use of cesses and surcharges, which are not shared with the states. Since the onset of the Covid-19 pandemic, the share of these levies in the Centre’s gross tax revenue has risen from 9–12 per cent to over 15 per cent. Last year, Tamil Nadu Chief Minister MK Stalin had called for an increase in the state’s share of central taxes to 50 per cent, citing concerns over reduced devolution of funds and mounting financial burdens due to centrally-sponsored schemes. Speaking to Panagariya in Chennai, Stalin maintained the need for a revised fiscal framework that supports states like Tamil Nadu. He argued that allocating additional funds to high-performing states would enhance India’s "overall development and economic strength".
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The Reserve Bank's rate-setting panel started its three-day brainstorming on monetary policy as expectations are high of a 25 bps or even a jumbo 50 bps rate cut to fuel economic growth amid uncertainties created by Trump's tariff moves.
The decision of the Monetary Policy Committee (MPC), headed by Reserve Bank Governor Sanjay Malhotra, will be announced on Friday.
The RBI reduced the key interest rate (repo) by 25 bps each in February and April, bringing it to 6 per cent.
This could be the third back-to-back reduction in the short-term benchmark lending rate.
In response to the 50-bps cut in the policy repo rate since February 2025, most of the banks have reduced their repo-linked external benchmark-based lending rates (EBLRs) and marginal cost of funds-based lending rate (MCLR).
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Experts are of the view that the RBI may reduce the repo rate by 25 bps on Friday and another similar cut in the next policy. However, an SBI research expects the central bank to go in for a "jumbo" rate cut of 50 bps in June itself.
CareEdge Ratings said falling inflation will give the RBI the flexibility to prioritise growth amidst external headwinds.
While growth momentum has improved, challenges like uneven consumption recovery, muted private capex growth, and subdued manufacturing growth remain. CPI inflation is expected to stay comfortable in 2025-26, it said.
"This opens room for further monetary policy easing. We expect the RBI MPC to cut the policy rate by another 50 bps in FY26 (including 25 bps in June), with chances of a deeper rate cut cycle if growth falters," it said.
Deepak Aggarwal, Co-founder and Co-CEO of Moneyboxx Finance said that with inflation expected to remain below the RBI's 4 per cent target and growth holding steady, the upcoming MPC meeting presents an encouraging window for a calibrated rate cut.
"A lower interest rate regime, supported by targeted liquidity measures, can meaningfully strengthen credit flow to MSMEs and NBFCs, especially those serving rural and semi-urban regions," Aggarwal said.
Raoul Kapoor, Co-CEO of Andromeda Sales and Distribution, said there are strong indications and widespread expectations that the RBI will implement a third round of rate cut later this week.
Should another 25 bps rate cut occur, it would bring the cumulative rate reduction in the calendar year 2025 to a notable 75 basis points.
"The easing of rates not only provides immediate financial relief but also stimulates consumer spending and investment, potentially bolstering overall economic growth. As a result, both existing and potential borrowers can look forward to a more favourable borrowing landscape in the coming months," Kapoor said.
Mandar Pitale, Head, Financial Markets, SBM Bank (India) opined that the upcoming RBI MPC meeting is coming at the backdrop of a strong GDP growth print of 7.4 per cent, which was significantly higher than the market expectation of 6.8 per cent.
"We expect a 25 bp cut in policy rate at the June MPC meeting. This, coupled with the ongoing accommodative stance, will position MPC to react to any data surprises on either side,' Pitale said, and added there may be another 25 bps reduction in August by the RBI.
On his expectations from the 55th meeting of MPC, Rohit Arora, CEO and Co-Founder of Biz2X & Biz2Credit said a rate cut in the range of 25- 50 basis points appears likely, supported by inflation staying below the 4 per cent target and continued moderation in core inflation.
"This would provide a timely boost to credit flow, especially for MSMEs and housing, while reinforcing growth momentum. While the RBI remains focused on domestic conditions, global cues like the US Fed's projection of two rate cuts in 2025 also provide comfort on the external front," Arora said.
The MPC consists of three members from the RBI and three external members appointed by the government.
RBI members are: Governor Sanjay Malhotra, Deputy Governor M Rajeshwar Rao, and Executive Director Rajiv Ranjan.
The external members are: Nagesh Kumar, Director and Chief Executive, Institute for Studies in Industrial Development, New Delhi; Shri Saugata Bhattacharya, Economist, Mumbai; and Professor Ram Singh, Director, Delhi School of Economics, Delhi.
(Only the headline and picture of this report may have been reworked by the Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)
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