Budget 2026: How Are Central Funds Distributed Among States? Know How The Parameters Changed Over Years

Budget 2026: The Union Budget for the upcoming financial year was announced on Sunday, with a major focus on the infrastructure, defence and telecommunication sectors. The central tax revenues will be distributed among the states on the basis of several factors, including population, their contribution to the Gross Domestic Product (GDP), and fiscal capacity. The parameter has changed significantly over the years to maintain the growth of the economically leading states and to boost the states lagging on the economic fronts.

The parameter used to decide how the central tax revenues will be distributed among the states has changed over the years from population to other factors, including demographic performance, forest cover, and contribution to GDP. One of the biggest factors in how the fund is distributed is the gap between a state's income and that of the richest states. However, its weight has significantly declined from 62.5 per cent in the 11th Finance Commission to 42.5 per cent in the 16th.

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Population is also one of the biggest factors while sharing the funds to ensure the states with the larger population get enough funds for their developmental projects. While the commissions earlier relied on the data of the 1971 Census, the 2011 Census was partially introduced from the 14th Finance Commission onwards. The weight of figures of the 2011 Census was 17.5 per cent in the 16th Commission, showing its prominence.

Apart from this, the 13th Finance Commission replaced income distance with fiscal capacity distance to ensure fair distribution of the funds. The fiscal capacity distance assesses the gap between a state’s per capita tax capacity and the best-performing state.

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The 16th Finance Commission included “contribution to GDP” as a new parameter, allocating it a 10 per cent weight while sharing the funds. However, the poorer states objected to it by stating that it will further increase the gap between the rich and the poor states.