The Union Budget 2026-27 indicates that the Government of India is not keen to address concerns repeatedly raised by several states, particularly Tamil Nadu, regarding increasing stress on their finances and the need to expand the divisible pool.
The Budget, presented by Finance Minister Nirmala Sitharaman, shows that the union government has accepted the 16th Finance Commission’s recommendation to maintain states’ share in the proceeds of shareable union taxes and duties at 41% for the next five years. This is the same share that was in force over the previous five years under the 15th Finance Commission’s recommendations.
Although the divisible share remains fixed at 41%, the growing collection of cesses and surcharges, which are excluded from the divisible pool, has meant that the effective share of revenue devolved to states remains at just 30%–33%.
The continuation of this mechanism comes against the backdrop of the centre pushing greater financial responsibility onto states for implementing Centrally Sponsored Schemes (CSS) such as the Viksit Bharat — Guarantee for Rozgar and Ajeevika Mission (Gramin), which replaced the Mahatma Gandhi National Rural Employment Guarantee Scheme.
By requiring states to spend more on CSS and often linking the release of funds to the implementation of specific policy prescriptions, the centre continues to exert considerable influence over states’ expenditure decisions.
States raising concerns over these measures, which not only impinge on their fiscal autonomy but also add to their debt burden, risk intensifying the polarising ‘North versus South’ debate. Such a development does not augur well for a country seeking to position itself as a resilient and powerful economy.
Importantly, at a time when the global economic and political order is being upended, a disconnect is evident between the Economic Survey 2025-26 and the Budget. While the Survey advocated large-scale reforms to make India a manufacturing hub and more resilient to global turbulence, such long-term measures are not clearly spelt out in the Budget.
There is also a disconnect on two other fronts. The government did not announce any flagship populist measure, which traditionally finds a place in the Budget. Although the emphasis was on fiscal consolidation, there was room for such measures, given that real GDP growth is projected at 7.4% for 2025-26.
More notably, despite TN, Kerala, West Bengal and Assam heading for Assembly polls in a few months, the Budget departs from past practice by avoiding major announcements targeted at poll-bound states, unlike last year’s Budget, which included significant announcements for Bihar.
A Kalaiyarasan
Associate Professor of Development Studies at the Madras Institute of Development Studies (MIDS) and a Visiting Research Fellow at King’s College London
(As told to Pon Vasanth B A @ Chennai)
