Union Budget: hike in divisible tax pool to 2.38% brings relief to Kerala

The 16th Finance Commission, whose report was tabled in Parliament on Sunday, has hiked Kerala’s share in the divisible tax pool to 2.382% for the five-year award period from 2026-27. The decision to increase the State’s share from 1.92% under the 15th panel brings relief to the State which has been ruing large cuts in resources.

Kerala has been lamenting that its share had come down from 3.88% under the 10th Finance Commission to 1.92% under the 15th.

However, Kerala’s demand that the devolution to States be raised from the present 41% to 50% has not been accepted. Which means, tax revenues in the divisible pool will continue to be shared at a 41:59 ratio between the States and the Union.

Much to Kerala’s dismay, the 16th panel, headed by Arvind Panagariya, has decided not to recommend any revenue deficit (RD) grants to States. The commission noted that it has done so “in continuation of the diminishing trend of the RD grants recommended by the 15th FC, which reduce to near‑zero level by 2025‑26.” The commission also did not recommend sector-specific or State-specific grants. In its initial memorandum submitted to the commission in December 2024, the State had sought sector-specific unconditional grants for it.

Disaster grants

With respect to State-wise allocation of ‘Disaster Grants,’ the 16th commission has allocated ₹2,580 crore to Kerala, as well as ₹2,064 crore as the State Disaster Response Fund allocation from 2026-27 to 2030-31.

With respect to the formula for horizontal devolution, the Finance Commission has revised almost all the criteria, but not at the scale sought by Kerala. In the case of ‘Income distance,’ the commission has reset it at 42.5% from 45% under the 15th commission. Kerala had wanted this at 30%. The weightages for ‘Demographic Performance,’ ‘Area,’ and ‘Forest’ have each been reset at 10%. Kerala had wanted these respectively at 22.5%, 5% and 7.5%. Kerala had suggested that the 15% weightage for ‘population’ be increased to 32.5%, but this has been kept at 17.5%. The commission has dispensed with the ‘tax and fiscal effort’ criterion, which carried 2.5%, and replaced it with ‘Contribution to GDP’ which carries 10% weightage.