Sp Issue on 16th Finance Commission- (wl-3007)-The Prosperity Paradox: Devolution Conundrum for the Finance Commission

We highlight two key issues of concern for the 16th Finance Commission. Declining progressivity in devolution is evidenced by the downward trend in the share of lower-income states in the divisible pool and a paradox of declining fiscal capacity of States with rising per capita income. Neither the low-income nor the high-income states benefited from the income distance criterion having the highest weight in the devolution, assuming a positive relation between fiscal capacity and per capita income. The study calls for adjustments in the weights of income distance criterion and population to ensure that the performers are not penalised while progressivity is ensured