Union Budget 2026-27: Southern States Secure Higher Tax Share, Hindi Heartland Faces Dip
The Union Budget for 2026-27 has unveiled significant changes in the allocation of tax revenues among Indian states, with southern states emerging as major beneficiaries while Hindi heartland states experience a notable decline. This shift stems from the recommendations of the 16th Finance Commission, which were accepted by the government just ahead of Finance Minister Nirmala Sitharaman's Budget speech.
Southern States Gain Additional Rs 18,330 Crore
The five southern states—Karnataka, Kerala, Andhra Pradesh, Telangana, and Tamil Nadu—are set to receive an additional Rs 18,330 crore from the total divisible tax pool of Rs 15.26 lakh crore in 2026-27. This increase comes in comparison to their share as recommended by the previous 15th Finance Commission. The enhanced allocation reflects a strategic recalibration of the horizontal devolution formula, which now places greater emphasis on economic contributions.
Specifically, Karnataka's share has risen from 3.64% to 4.13%, Kerala from 1.92% to 2.38%, Andhra Pradesh from 4.04% to 4.21%, Telangana from 2.10% to 2.17%, and Tamil Nadu from 4.07% to 4.09%. This adjustment aligns with long-standing demands from southern states for a higher share, citing their superior performance on various developmental indicators and their substantial contributions to the national GDP.
Hindi Heartland States See Significant Decline
In contrast, the five Hindi heartland states—Uttar Pradesh, Bihar, Madhya Pradesh, Chhattisgarh, and Rajasthan—will witness an aggregate decline of Rs 17,338.28 crore compared to their previous allocations. Among these, Madhya Pradesh faces the most substantial reduction, with its share dropping from 7.85% to 7.35%. This dip underscores the shifting priorities in resource distribution, moving away from traditional parameters like area and population towards more performance-based criteria.
New Criteria Drive the Shift
The 16th Finance Commission has introduced a revised formula for horizontal devolution, incorporating six key criteria with adjusted weights:
- Population: 17.5% weight
- Demographic performance: 10% weight
- Area: 10% weight (reduced from 15%)
- Forest cover: 10% weight
- Per capita GSDP distance: 42.5% weight
- Contribution to GDP: 10% weight (a new criterion)
This marks a departure from the 15th Finance Commission's formula, which included population (15%), area (15%), forest and ecology (10%), income distance (45%), tax and fiscal efforts (2.5%), and demographic performance (12.5%). The introduction of 'contribution to GDP' as a new criterion, coupled with the reduced weight for 'area,' has particularly favored southern states, known for their robust economic output.
Other States Affected
Beyond the southern and Hindi heartland states, several other regions are impacted by the new allocations. States set to benefit include Gujarat, Haryana, Punjab, Assam, Maharashtra, Himachal Pradesh, Mizoram, Jharkhand, and Uttarakhand. Conversely, states like Goa, Sikkim, Tripura, Nagaland, Manipur, Odisha, Meghalaya, West Bengal, and Arunachal Pradesh are expected to see declines in their shares.
Budget Context and Implications
The report of the 16th Finance Commission was tabled by Finance Minister Nirmala Sitharaman in the Lok Sabha, with the government accepting its key recommendations. While the overall states' share remains at 41% of the net proceeds of Union taxes, the redistribution highlights a focus on incentivizing economic performance and addressing regional disparities. This move comes amid political considerations, with Tamil Nadu and Kerala heading for Assembly polls this year, potentially influencing public perception and policy discourse.
The Union Budget 2026-27 thus not only outlines fiscal priorities but also reshapes the landscape of federal financial relations, emphasizing a data-driven approach to resource allocation that rewards states for their economic contributions and developmental achievements.
