The 16th Finance Commission was constituted under Article 280 of the Constitution to recommend how the Union government’s tax revenues should be shared with states and what grants-in-aid should be given for the period 2026-27 to 2030-31 to the states as well as the PRIs and ULBs.
Its recommendations therefore play a pivotal role in India’s fiscal federalism. 
In respect of States’ Share in Divisible Pool (Vertical Devolution) the commission retained it at 41%, the same level as the 15th Finance Commission (covering 2021-26). This implies that 41% of central tax revenues (like income tax, corporation tax, and GST) will be shared with all states collectively. Several states, including Odisha, had urged to increase it to 50%, arguing that higher shares are needed to meet rising expenditures and expand untied resources. However, the Commission noted that increasing the share further could constrain the Centre’s ability to meet national obligations and therefore opted to retain the 41% benchmark. 
The Commission also made important changes in the horizontal formula — the method used to decide how that 41% pool is to be apportioned among individual states. For the first time it introduced GDP contribution (10%) as a new criterion, acknowledging a state’s economic output and efforts. 
Further, it modified the weightages of existing criteria like population, income distance, area, forest cover, and demographic performance. While the income distance criterion got weightage of 42.5 % in place of 45% in the last time, population got 17.5 % in place of 15% earlier. While area criterion received 10% in place of 15% , demography got 10% against 12.5% in the previous dispensation. Forest criterion remained at 10% as before. As a historic step 16th FC introduced state’s GSDP to country’s GDP as a horizontal criterion to measure the fiscal efficiency of the states. Similarly, forest and ecology criterion was redesigned to include open forest and increase in forest cover in a state.
For the first time the Commission decided to do away with revenue deficit grants and state-specific grants, pushing states toward stronger fiscal discipline. The aim is to balance equity (support for poorer states) and efficiency (reward for performance), but this also leads to shifts in how much each state receives.
The abolition of Revenue Deficit Grants mandated under Article 275 (1) of the Constitution is itself a negation of the very basic principles of formation of the Finance Commission in a federal fiscal system. All along it was intended to bridge the post devolution revenue and assessed revenue needs of a state as a gap filling approach. Future will say how pragmatic it was to suggest abolition of the Revenue Deficit Grants. The states having less capacity to raise revenue may face problems in meeting their obligations on account of revenue expenditures.
Under the 15th Finance Commission, Odisha’s share in the divisible pool was about 4.528%.However, the 16th Finance Commission’s recommendations have reduced that share to around 4.42% for the award period starting from 2026-27.
The horizontal distribution depends on several weighted criteria — and slight recalibrations in these weights mean Odisha’s proportion of the overall 41% pool gets diminished. As the weight on population and other parameters changed, shifting shares among states occurred. Odisha batted for a higher share (about 4.964%) but did not secure it.
Comparative figures suggest Odisha’s share has eroded marginally because other states, especially in the south and west, gained slightly larger proportions under the revised formula mix.
It is observed that successive Finance Commissions during last two decades have consistently decreased the share of Odisha in the divisible pool putting the state at a disadvantage. A state fulfilling all the criteria fixed by the Finance Commissions and FRBM targets gets a raw deal. Since it is now a so called double engine regime the state government is not in a position to raise its voice.
The reduction in Odisha’s share, although numerically modest (from 4.528% to 4.42%), carries significant fiscal implications. It will amount to Lower Tax Devolution Receipts.
Using estimates for the fiscal year 2026-27:
Odisha’s tax devolution under the old share (4.528%) would have meant a higher amount. Now the revised share (4.42%) translates to a loss of revenue of several hundred crores relative to expectations. These lower transfers will reduce funds available for state priorities such as health, education, infrastructure, and disaster management.
Consequently, states like Odisha, those who depend on tax devolution for a large portion of its revenue receipts will face resource crunch. A smaller share means truncated fiscal space for development programs. Potentially lower capital expenditure unless offset by own tax revenue growth would lead to lower level of capital spending.
It would force more reliance on own revenues and borrowings to meet the obligations.
Needlessly, the central tax transfers are a key component of Odisha’s annual revenue plan and reductions can tighten the overall resource envelope of the budget.
The Commission’s removal of revenue deficit grants and state-specific grants further reduces transfers, tightening fiscal flows to the states. States must now adjust by either cutting expenditure or boosting own revenue measures. 
Odisha had also advocated that the Commission recommend dedicated grants for urban and rural local bodies and 100% central funding for the State Disaster Response Fund (SDRF) given frequent cyclones and disasters visiting the state. However, these were not fully adopted, leaving the state to bear more financial burden.
Estimates show that the PRIs and ULBs in the state would not gain from the Union government on the basis of the recommendations of the Commission.
The FC-16 framework reflects broader shifts in India’s fiscal landscape.
Odisha’s experience highlights the tension between equity (support for lagging regions) and efficiency (rewarding growth) in fiscal federalism.
To sum up, the 16th Finance Commission’s recommendations have reaffirmed the 41% states’ share in the divisible pool but recalibrated how this shared amount is distributed among the states. In respect of Odisha, this has resulted in a slight but significant reduction in its share of the divisible pool— from around 4.528% to 4.42% — with far reaching implications for the state’s revenue availability and budget planning.While fiscal discipline and a more performance-linked system may encourage efficiency, Odisha and similar states may face challenges in maintaining desired levels of public investment and social spending without adjustments in their own resource mobilisation and expenditures framework.
