The move aims to boost the weight of HDI and SDGs to reshape resource allocation and address financial challenges
The Indian government proposes to urge the upcoming 16th Finance Commission to assign greater weight to the human development index (HDI) and sustainable development goals (SDGs) in its recommendations on resource distribution among states. Additionally, there are indications that climate goals might be incorporated into the formula.
Currently formulating the terms of reference for the imminent 16th Finance Commission, the government seeks to expand the Commission's purview. Apart from considering fiscal transfers to urban and rural local bodies, the Commission may also be tasked with examining conditions related to climate objectives, according to a senior official familiar with the matter.
The official highlighted that the 16th Finance Commission would build upon its predecessor, the 15th Finance Commission, by asking it to consider giving more weight to the HDI and SDGs while determining the revenue share.
According to reports, the 15th Finance Commission assigned weights to demographic performance (12.5 percent), income (45 percent), population (15 percent), forest and ecology (10 percent), and tax and fiscal efforts (2.5 percent). The 16th Finance Commission is expected to notify the terms of reference for the proposals soon.
Article 280 of the Indian Constitution empowers the President of India to establish a Finance Commission tasked with recommending the distribution of tax proceeds between the Centre and states. The Commission's recommendations, guided by the Ministry of Finance's terms of reference, are applicable for five years. The proposals of the 16th Finance Commission are likely to take effect from April 2026 to March 2031.
The government's focus extends beyond the distribution of resources; it aims to enhance the financial health of municipal bodies. Concerns about inefficiencies in fund utilisation and poor accounting practises by some municipal bodies have been raised by entities such as the Reserve Bank of India (RBI), the Department of Expenditure, and state finance commissions, according to the ET report.
As the government shapes the mandate for the 16th Finance Commission, addressing these challenges will be critical to its agenda.