States and Fiscal Challenges

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The Sixteenth Finance Commission must address fiscal imbalances, ensure equitable resource distribution, and support high-performing states like Tamil Nadu in navigating unique demographic and urbanization challenges.

The Sixteenth Finance Commission has the critical task of balancing equitable redistribution of resources while incentivizing high-performing states amidst global economic shifts like "friendshoring" and "reshoring." The vertical share of divisible resources allocated to states has declined to 33.16% of the Union’s gross tax revenue, exacerbated by rising cess and surcharges.

States, which manage substantial developmental responsibilities, require a larger share of taxes to support localized schemes. A fair share could involve 50% devolution of central taxes. Horizontal redistribution, historically focused on less-developed states, needs rethinking to ensure a larger national economic pie that balances resources equitably.

Progressive states like Tamil Nadu face specific challenges, including declining consumption-based tax revenue and rising costs due to an aging population. Urbanization in Tamil Nadu, with an expected 57.3% urban population by 2031, demands significant infrastructure investment to avoid stagnation in growth. The Commission’s mandate extends beyond fiscal arithmetic to fostering sustainable growth and resilience across all states.