The recent agitations by the governments of Kerala and Karnataka, and the support extended by several State governments, have highlighted many disquieting issues in the practice of fiscal federalism in India. These agitations show that the newly constituted 16th Finance Commission (FC) would have to proceed seriously and innovatively to justly address complaints of increasing vertical and horizontal inequalities in devolution.
Within the domain of vertical devolution — that is the sharing of resources between the Union and States — there are two disturbing trends that need urgent redressal. First, the Union government has sought to keep an increasing share of its proceeds out of the divisible pool so that they need not be shared with States. Secondly, it has also not been devolving the shares of net proceeds to the States as mandated by successive FCs.
