Daily Editorial Analysis 26 May 2026

Finance Commission Transfers and Equity Issue

Context

• India’s fiscal federalism is designed to balance financial relations between the Centre and the States.
• The Finance Commission (FC) plays a vital role in correcting vertical imbalance between revenue powers and expenditure responsibilities, and horizontal imbalance among States with differing economic capacities.
• The 16th Finance Commission retained the States’ 41% vertical devolution share and continued to prioritise equity-based redistribution.
• However, this has intensified debates between economically stronger and fiscally weaker States over fairness, efficiency, and fiscal autonomy.

The Constitutional Role of the Finance Commission

• The FC distributes the Union’s tax revenues between the Centre and States and among States themselves.
• Historically, the Commission has focused on reducing regional disparities through criteria such as income distance, population, and demographic performance.
• Poorer States receive higher transfers to ensure balanced development and equal access to public services.
• The 16th FC largely continued this redistributive model, but economically stronger States argued that the present system disproportionately rewards weaker States while reducing incentives for growth and efficient governance.

Fiscal Pressures Faced by States

• Impact of GST and the Pandemic
  • The introduction of the Goods and Services Tax (GST) reduced States’ independent taxation powers by subsuming several State taxes into a unified framework.
  • At the same time, the COVID-19 pandemic increased expenditure burdens while reducing revenues, causing rising public debt and shrinking fiscal space.
• Expansion of Centrally Sponsored Schemes
  • The growing role of Centrally Sponsored Schemes (CSS) has further weakened fiscal autonomy.
  • Programmes such as the National Rural Employment Guarantee programme require States to bear a significant share of expenditure, limiting their spending flexibility.
• Declining Fiscal Autonomy
  • States also criticised the increasing use of cesses and surcharges, which are excluded from the divisible pool and therefore not shared with States.
  • Since these now exceed 15% of gross tax revenues, several States demanded either their inclusion in the divisible pool or a cap of 8–10%.
  • In addition, the Centre earns substantial non-tax revenues from natural resources, asset monetisation, and transfers from the Reserve Bank of India (RBI).

Equity versus Efficiency in Fiscal Transfers

• Equity-Based Redistribution
  • The 16th FC gave the highest weight, 5%, to income distance, ensuring larger transfers to poorer States such as Uttar Pradesh, Bihar, Madhya Pradesh, and West Bengal.
  • This approach reflects the principle of equalising developmental opportunities across the country.
• Criticism from Better-Performing States
  • The combined share of southern States, Andhra Pradesh, Karnataka, Kerala, and Tamil Nadu, declined significantly over successive FC periods, while major beneficiary States gained larger shares.
  • Southern States contribute disproportionately to national GDP, industrial output, and tax revenues, yet receive relatively lower transfers.
  • This has created concerns about imbalance in the federal structure.

Limitations of the Existing Transfer System

• Persistent Public Service Disparities
  • For example, Bihar’s spending on healthcare and elementary education remains far below that of smaller States such as Arunachal Pradesh and Sikkim.
  • This shows that unconditional transfers alone cannot guarantee better governance or improved public service delivery.
• Weak Incentives for Fiscal Discipline
  • The current system may weaken incentives for revenue mobilisation, fiscal responsibility, and efficient administration.
  • Better-performing States argue that greater importance should be given to fiscal effort, governance quality, and economic productivity rather than relying mainly on redistributive criteria.

Evaluation of the 16th Finance Commission’s Recommendations

• Criteria and Weight Distribution
  • The Commission assigned:
    • 5% to income distance,
    • 5% to population,
  • 10% each to area, forest cover, demographic criterion, and GDP contribution.
  • Although States’ contribution to national GDP replaced tax effort, the FC used a square-root transformation instead of actual GSDP shares, reducing the advantage of economically larger States such as Maharashtra, Tamil Nadu, and Karnataka.
• Limited Shift toward Efficiency
  • The balance between equity and efficiency changed only slightly:
    • 15th FC: 75% equity and 25% efficiency.
    • 16th FC: 70% equity and 30% efficiency.
  • As a result, poorer States continued receiving larger shares, while stronger States achieved only marginal gains.

Political Economy and the Future of Fiscal Federalism

• States with larger parliamentary representation are often fiscally weaker but politically influential.
• This issue may intensify after delimitation, increasing concerns among southern States regarding both political and financial marginalisation.
• Future Finance Commissions should therefore focus more on fiscal capacity, governance outcomes, and data-driven methods such as Principal Component Analysis (PCA) to ensure a more balanced and transparent devolution system.

Conclusion

• The debate surrounding the 16th FC reflects the broader challenge of balancing redistribution with economic efficiency in India’s federal structure.
• While equity remains essential for national integration, excessive reliance on equalisation may discourage fiscal discipline and productive governance.
• A sustainable model of fiscal federalism must combine support for weaker States with incentives for growth, accountability, and efficient administration.

Finance Commission Transfers and Equity Issue FAQs

Q1.  What is the main role of the Finance Commission?
Ans. The Finance Commission distributes tax revenues between the Centre and the States.

Q2. Why are States demanding a higher share in tax devolution?
Ans. States are demanding a higher share because their fiscal pressures and expenditure responsibilities have increased.

Q3. What is income distance in fiscal transfers?
Ans. Income distance measures the gap between a State’s income and that of the richest State.

Q4. Why do southern States criticise the present devolution formula?
Ans. Southern States believe the formula gives insufficient weight to economic performance and fiscal discipline.

Q5. What reform has been suggested for future Finance Commissions?
Ans. Future Finance Commissions should focus more on fiscal capacity, governance outcomes, and data-driven methods.

Source: The Hindu

Water Governance in Peri-Urban Areas

Context

• India has achieved remarkable progress in improving access to drinking water through the Jal Jeevan Mission, which has provided tap water connections to nearly 80% of rural households.
• Urban areas, despite facing periodic shortages, generally receive intermittent water supply.
• However, between the rural and urban landscape lies a neglected missing middle, the rapidly expanding peri-urban
• These areas, where villages gradually transform into industrial and residential settlements, face severe challenges related to water supply, sanitation, and governance.
• The absence of proper administrative recognition has made peri-urban India one of the most vulnerable regions in the country’s development process.

Growth of Peri-Urban India

• Rapid Urbanisation and Census Towns
  • India’s rapid urbanisation is evident in the sharp rise of Census towns, which increased from 1,362 to 3,784 over the last two decades.
  • These settlements are no longer purely rural, yet they have not been fully recognised as urban centres.
  • As a result, they remain trapped between rural administration and urban governance systems.
• Governance Vacuum
  • The lack of institutional clarity has created a major governance crisis. Peri-urban residents often pay urban-level costs but receive inadequate services.
  • In Gurugram, for instance, peri-urban areas were brought under municipal administration after rural governance structures were abolished.
  • However, weak civic management has left residents with poor water and sanitation facilities.
  • Similarly, residents of Rawta village near Delhi receive water only on alternate days and during late-night hours.
  • Such irregular supply forces families to sacrifice sleep for collecting water and increases dependence on private water vendors.

Environmental and Social Consequences

• Groundwater Contamination
  • Poor waste management has severely damaged the environment in peri-urban areas.
  • In peri-urban Hyderabad, toxic leachate from dumping sites has contaminated groundwater, creating major health risks for local communities.
• Unequal Water Distribution
  • Urban expansion often diverts resources away from rural and peri-urban populations.
  • Water from the Bisalpur dam, originally intended for irrigation in Tonk and Sawai Madhopur, is increasingly redirected to meet Jaipur’s urban demands.
  • Consequently, downstream farmers suffer from reduced water access and declining agricultural productivity.
• Public Health Risks
  • The lack of proper sanitation systems has intensified public health concerns. Nearly 40 million urban households rely on septic tanks and other on-site sanitation systems.
  • However, irregular desludging and illegal dumping of untreated septage into rivers and fields contribute to pollution and disease, undermining the achievements of the Swachh Bharat Mission.

Future Challenges

• Expanding Urban Demand
  • India’s future urban growth will place enormous pressure on existing infrastructure.
  • By 2047, the country is expected to require 230 million new housing units and nearly 500 new cities. Today’s peri-urban regions will become tomorrow’s urban centres.
• Threat to Water Security
  • Without proper planning, India may face worsening water scarcity, environmental degradation, and rising inequality.
  • Peri-urban areas therefore hold the key to the country’s future water security and sustainable development.

Solutions and Policy Recommendations

• Strengthening Governance
  • The first step is to address the administrative vacuum through the establishment of Nagar Panchayats, as envisioned under the 74th Constitutional Amendment.
  • Legal recognition must be accompanied by stronger institutional capacity and accountability.
  • Successful local initiatives, such as the collaborative platform in Sultanpur village, demonstrate that cooperation between authorities, engineers, and residents can improve governance.
• Protecting Water Sources
  • Long-term sustainability requires protecting drinking water sources from encroachment, pollution, and waste dumping.
  • Community-based sanitary inspections, already successful in Maharashtra, can help strengthen local participation in water management.
• Swachh Bharat Mission 3.0
  • A specialised Swachh Bharat Mission 3.0 should focus on peri-urban sanitation.
  • The programme should prioritise faecal sludge management, treatment plants in underserved regions, GPS-monitored desludging trucks, and mini-cesspool vehicles for narrow settlements.
  • Integrating sanitation costs into monthly water bills through a small levy could also improve financial sustainability.
• Decentralised Wastewater Treatment
  • India must also promote decentralised wastewater treatment technologies.
  • Companies such as Indra Water and Tigreen have developed systems capable of recycling more than 95% of used water while requiring minimal land and energy.
  • These technologies need stronger policy support, financial incentives, and government procurement mechanisms to expand effectively.
• Strategic Financing
  • Peri-urban water infrastructure should be treated as strategic infrastructure.
  • Blended financing models, such as Uttarakhand’s partnership-based approach combining state support with concessional international loans, can help fund sustainable water and sanitation systems.

Conclusion

• Peri-urban India represents the missing middle in the country’s development story.
• Despite its growing demographic and economic importance, it continues to suffer from weak governance, inadequate infrastructure, and environmental degradation.
• Challenges such as irregular water supply, groundwater contamination, poor sanitation, and unequal resource distribution threaten both public health and long-term sustainability.
• However, with effective governance reforms, innovative technologies, sustainable financing, and community participation, peri-urban India can transform into a water-secure, inclusive, and sustainable urban future.

Water Governance in Peri-Urban Areas FAQs

Q1. What are peri-urban areas?
Ans. Peri-urban areas are transitional regions between villages and cities that face both rural and urban challenges.

Q2. Why is peri-urban India facing a water crisis?
Ans. Peri-urban India faces a water crisis because of weak governance, irregular water supply, and poor infrastructure.

Q3. How does poor sanitation affect peri-urban areas?
Ans. Poor sanitation contaminates groundwater and increases public health risks through illegal waste dumping.

Q4. What is the role of the Jal Jeevan Mission?
Ans. The Jal Jeevan Mission aims to provide tap water connections to rural households across India.

Q5. What can improve water management in peri-urban India?
Ans. Better governance, decentralised wastewater treatment, and sustainable financing can improve water management in peri-urban India.

Source: The Hindu

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