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GS Paper: GS2

  • PIL Challenging VB-G RAM G Act, 2025

    Why in the News?

    A Public Interest Litigation has been filed before the Madras High Court challenging key provisions of the Viksit Bharat Guarantee for Rozgar and Ajeevika Mission Gramin Act, 2025, which replaced the Mahatma Gandhi National Rural Employment Guarantee Act, 2005.

    Background

    • The earlier law, Mahatma Gandhi National Rural Employment Guarantee Act, provided a statutory right to 100 days of wage employment to rural households and was regarded as one of the world’s largest social protection programmes.
    • The new Viksit Bharat Guarantee for Rozgar and Ajeevika Mission (Gramin) Act has altered the funding pattern, administrative control and implementation structure.
    • The matter is likely to be heard by a Division Bench of the Madras High Court.

    Key Issues Raised in the PIL

    • Change in Cost Sharing Ratio

        • Earlier under MGNREGA: Centre and States shared costs in 90:10 ratio.
        • Under new Act: 90:10 only for Northeastern and Himalayan States
        • 60:40 for other States
        • Petitioner argues this increases fiscal burden on States and weakens federal balance.

    • Reduction in Panchayat Autonomy

        • MGNREGA made Gram Panchayats principal implementing authority.
        • Linked to the 73rd Constitutional Amendment which strengthened local self government.
        • Allegation that the new Act dilutes decentralisation guarantees.

    • Constitutional Challenge

        • The petition claims certain provisions violate:
        • Article 14: Equality before law
        • Article 16: Equality of opportunity
        • Article 21: Protection of life and personal liberty
        • Argument: Right to livelihood is part of Article 21 jurisprudence.

    • Specific Sections Challenged

      • Sections 3(1), 4(5), 5(1), 6(2), 22, 30, 34 and 37 of the new Act are alleged to be unjust and anti federal.
      • Section 3(1): Requires States to frame schemes consistent with the Act within six months of commencement.
    [2011] Among the following who are eligible to benefit from the “Mahatma Gandhi National Rural Employment Guarantee Act”? (a) Adult members of only the scheduled caste and scheduled tribe households 

    (b) Adult members of below poverty line (BPL) households 

    (c) Adult members of households of all backward communities 

    (d) Adult members of any household

  • AI Impact Summit 2026

    Why in the News?

    India is hosting the AI Impact Summit 2026 from February 16 to 20 at Bharat Mandapam, New Delhi. The Prime Minister is inaugurating the India AI Impact Expo 2026, with participation from global tech leaders and representatives from nearly 100 countries.

    About AI Impact Summit 2026

    1. Edition: 4th AI Impact Summit.Previous editions were held in the U.K., South Korea and France. First time hosted in a Global South country.
    2. Venue: Bharat Mandapam, New Delhi. Same complex that hosted the G20 Leaders’ Summit 2023.
    3. Theme Structure: Organized around three thematic chakras People, Planet and Progress

    Key Highlights

    • Participation of global tech CEOs including: Sundar Pichai, Sam Altman, Demis Hassabis, Dario Amodei and Brad Smith
    • Attendance by global leaders including: Emmanuel Macron, Luiz Inácio Lula da Silva and António Guterres
    • Bilateral engagements on the sidelines.
    • Dedicated all women hackathon.
    • Leaders’ summit and Tech CEO roundtable.
    [2025] Consider the following statements regarding AI Action Summit held in Grand Palais, Paris in February 2025: I. Co-chaired with India, the event builds on the advances made at the Bletchley Park Summit held in 2023 and the Seoul Summit held in 2024. 

    II. Along with other countries, the US and UK also signed the declaration on inclusive and sustainable AI. 

    Which of the statements given above is/are correct? 

    (a) I only (b) II only (c) Both I and II (d) Neither I nor II

  • India tested, from U.S sanctions to one sided trade deal

    PYQ Relevance

    [UPSC 2019] “What introduces friction into the ties between India and the United States is that Washington is still unable to find for India a position in its global strategy, which would satisfy India’s National self- esteem and ambitions” Explain with suitable examples.

    Linkage: It tests India-U.S. strategic divergence under GS II. It directly links to tariff pressure and U.S. demands on Russian oil, highlighting friction between U.S. global strategy and India’s strategic autonomy.

    Mentor’s Comment

    India’s strategic autonomy faces renewed scrutiny amid U.S. tariff diplomacy and sanctions-linked trade conditionalities. The episode raises core questions of sovereignty, regulatory fairness, executive overreach, and balance-of-power politics. 

    Why in the News?

    India and the U.S. have concluded an Interim Trade Agreement after the U.S. imposed 25% tariffs in August 2025. The tariffs were linked to India’s Russian oil imports, which had peaked at ~40% in 2024 before falling to ~25% by late 2025. The episode shows how trade is increasingly tied to strategic and energy considerations.

    Does U.S. Tariff Diplomacy Undermine Rules-Based Trade Governance?

    1. Unilateral Executive Action: Links tariff reduction to geopolitical compliance rather than WTO-consistent trade negotiations; weakens multilateral dispute mechanisms.
    2. Punitive Tariffs: Imposed 25% duties in August 2025 on Indian goods; subsequently rescinded through executive orders.
    3. Conditional Market Access: Seeks expanded U.S. access to Indian markets while pressing for reduction of Russian oil imports.
    4. Institutional Accountability: Bypasses negotiated reciprocity; shifts balance from institutional trade frameworks to executive discretion.

    How Does the Issue Impact India’s Strategic Autonomy Doctrine?

    1. Strategic Autonomy Principle: Preserves independent decision-making in defence, energy, and diplomacy.
    2. Energy Diversification: Russian oil share rose to ~40% of imports in 2024; reduced to 25% by late 2025.
    3. Defence Alignment Pressure: Trade terms implicitly linked with broader security cooperation including Indo-Pacific posture.
    4. BRICS Signalling: Constrains India’s credibility among BRICS members and Global South partners.

    Does Energy Security Justify Continued Russian Oil Imports?

    1. Energy Affordability: Discounted Russian crude lowered import bills amid global price volatility.
    2. Supply Stability: Ensures diversified sourcing amid Middle East uncertainty.
    3. Import Adjustment: Purchases already declining since November 2025; December 2025 imports at 38-month low.
    4. National Interest Standard: Foreign policy decisions aligned with economic stability rather than bloc politics.

    What Are the Implications for Federal Economic and Institutional Governance?

    1. Trade Policy Centralisation: Executive-level negotiation limits parliamentary scrutiny.
    2. Economic Sovereignty: Conditional trade concessions affect domestic regulatory autonomy.
    3. Chabahar Port Concerns: U.S. push to reduce Iranian linkage impacts India’s connectivity strategy to Central Asia.
    4. Policy Credibility: Abrupt compliance may weaken India’s long-term negotiation leverage.

    Does Compliance Strengthen or Weaken India’s Global Standing?

    1. Global South Leadership: India previously resisted unilateral sanctions pressure; retreat affects credibility.
    2. Multi-Alignment Strategy: Balances U.S., Russia, and developing nations; over-compliance narrows options.
    3. Precedent Risk: Accepting trade-linked geopolitical conditions institutionalises coercive diplomacy.
    4. Long-Term Diplomacy: Undermines perception of India as an independent pole in emerging multipolar order.

    How Does This Episode Reflect Changing U.S. Trade Strategy?

    1. Economic Statecraft: Uses tariffs as instruments of geopolitical leverage.
    2. Integrated Pressure Model: Links trade, sanctions, defence, and energy policies.
    3. Executive-Centric Diplomacy: Social media and executive orders shape negotiation narrative.
    4. Transactional Framework: Replaces value-based partnership rhetoric with outcome-based compliance metrics.

    Conclusion

    The India-U.S. interim trade agreement may have eased immediate tariff tensions, but it underscores a deeper structural shift in global politics, where trade, energy, and strategic alignment are increasingly intertwined. For India, the core challenge lies in safeguarding strategic autonomy while deepening economic engagement with the West. The durability of this partnership will depend not on transactional concessions, but on mutual respect for sovereign decision-making within an evolving multipolar order.

  • ​A decisive mandate: On Tarique Rahman, the BNP, the Bangladesh result

    Why in the News?

    The 2026 parliamentary elections in Bangladesh marked a decisive political transition. The Bangladesh Nationalist Party (BNP), led by Tarique Rahman, secured a parliamentary majority after the Bangladesh Awami League was barred from contesting. The episode raises questions of democratic restoration, institutional neutrality, and strategic implications for South Asia.

    How Did the 2026 Parliamentary Election Alter the Political Power Structure?

    1. Electoral Outcome: The Bangladesh Nationalist Party (BNP) secured a parliamentary majority and formed the government.
    2. Power Alternation: Marks a shift from prolonged Awami League dominance to opposition-led governance.
    3. Turnout Increase: Approximately 62-65% voter participation compared to ~40% in 2024.
    4. Public Mandate Signal: Higher participation indicates re-engagement of the electorate.

    What Are the Democratic Implications of the Awami League’s Exclusion?

    1. Party Disqualification: The Bangladesh Awami League was barred from contesting due to regulatory and legal action during transition.
    2. Competitive Neutrality Question: Absence of the principal rival affects level playing field.
    3. Institutional Scrutiny: Raises concerns regarding electoral fairness and regulatory independence.
    4. Legitimacy Debate: Procedural legality must be assessed alongside inclusiveness.

    How Will the Regime Change Impact Institutional Accountability?

    1. Parliamentary Oversight: New ruling party faces responsibility to ensure executive accountability.
    2. Judicial Role: Courts must maintain independence in handling cases involving former regime actors.
    3. Bureaucratic Neutrality: Administrative machinery must function beyond partisan alignment.
    4. Media Environment: Political transition may expand space for public debate.

    What Governance Challenges Confront the BNP Government?

    1. Economic Stabilisation: Inflation control and debt management remain immediate priorities.
    2. Youth Employment: Demographic pressures demand labour-intensive growth.
    3. Minority Protection: Political transition must not trigger retaliatory targeting.
    4. Law and Order: Ensures stability during post-transition consolidation.

    What are the regional geopolitical implications of Bangladesh’s regime change?

    1. Strategic Realignment: Alters South Asian power balance amid Chinese and U.S. influence expansion.
    2. Economic Diplomacy: Strengthens Bangladesh’s bargaining leverage in regional trade agreements.
    3. Security Architecture: Impacts BIMSTEC and sub-regional cooperation frameworks.
    4. Migration Governance: Influences cross-border population and minority protection debates.
    5. Hasina Factor: Complicates bilateral diplomacy due to her status as a fugitive in Dhaka and presence in Delhi.

    How Does the 2026 Transition Affect India-Bangladesh Relations?

    1. Diplomatic Reset: Facilitates re-engagement after ties declined under interim leadership.
    2. Security Cooperation: Ensures protection of Indian missions and cross-border intelligence coordination.
    3. Trade Restoration: Revives disrupted connectivity, trade corridors, and supply chains.
    4. Strategic Competition: Reclaims space ceded to Pakistan, the U.S., and China post-Hasina era.
    5. Bay of Bengal Strategy: Bangladesh remains central to maritime security architecture.

    Does Political Alternation Guarantee Democratic Consolidation?

    1. Procedural Democracy: Election conducted through constitutional mechanism.
    2. Substantive Democracy: Requires inclusive participation and institutional neutrality.
    3. Rule of Law: Application must remain non-selective.
    4. Long-Term Stability: Depends on balancing accountability with reconciliation.

    PYQ Relevance

    [UPSC 2022] ‘India is an age-old friend of Sri Lanka.’ Discuss India’s role in the recent crisis in Sri Lanka in the light of the preceding statement.

    Linkage: It tests India’s neighbourhood diplomacy, crisis response strategy, and balancing of strategic interests with regional stability. Similar to Bangladesh’s 2026 transition, it highlights how India must engage political crises in neighbouring states through calibrated support while safeguarding security

  • BNP Returns to Power in Bangladesh

    Why in the News?

    The Bangladesh Nationalist Party secured a landslide victory in Bangladesh’s parliamentary elections held on February 12. Party chief Tarique Rahman is set to form the next government, with transfer of power likely by February 17 or 18.

    Key Election Results

    • BNP led alliance won 212 seats, securing a two thirds majority in the Jatiyo Sangsad
    • 11 party alliance led by Jamaat-e-Islami won 77 seats
    • Independents won 8 seats

    National Referendum

    • 60.2 percent voters backed sweeping democratic reforms
    • Conducted alongside parliamentary elections
    • Signals mandate for institutional and governance reforms

    Transfer of Power

    • Interim government led by Muhammad Yunus to hand over power
    • Formal process after gazette notification by Election Commission
    • Oath taking to be legally validated following 2024 parliamentary dissolution

    International Reactions

    • Prime Minister Narendra Modi congratulated Tarique Rahman and reaffirmed India’s support for a democratic and inclusive Bangladesh
    • Congratulatory messages from US, China, Nepal and Maldives

    Political Context

    • 2024 mass uprising led to fall of previous government under Sheikh Hasina
    • Parliament was dissolved amid political unrest
    • Representation of women and minorities reportedly at a two decade low
    [2025] Consider the following countries: I. United Arab Emirates 

    II. France 

    III. Germany 

    IV. Singapore 

    V. Bangladesh 

    How many countries amongst the above are there other than India where international merchant payments are accepted under UPI? 

    (a) Only two (b) Only three (c) Only four (d) All the five

  • Medical Shabd Sindhu Initiative

    Why in the News?

    The Union Home Ministry has proposed compiling a standard English medical dictionary titled Medical Shabd Sindhu, which will be translated into 15 Indian languages to support medical education in regional languages under the National Education Policy 2020.

    About the Initiative

    • Led by the Department of Official Language under the Ministry of Home Affairs
    • Compilation of a standard English medical dictionary
    • At least 1,00,000 unique medical terms with explanations
    • Translation into 15 Indian languages in Phase I

    Languages include:

    • Hindi, Telugu, Assamese, Gujarati, Kashmiri, Kannada, Malayalam, Marathi, Odia, Punjabi, Tamil, Bengali, Manipuri, Mizo and Konkani
    • Later expansion to remaining Indian languages

    Institutional Background

    • Commission for Scientific and Technical Terminology under the Education Ministry has translated around 60,000 medical terms into Hindi so far
    • Madhya Pradesh became the first State to offer MBBS in Hindi in 2022
    • Initially, transliterated textbooks were provided in subjects such as anatomy, physiology and biochemistry

    Objectives

    • Promote medical education in mother tongue
    • Remove language barriers in professional courses
    • Strengthen regional language knowledge systems
    • Support NEP 2020 emphasis on multilingual education
    [2024] The Constitution (71st Amendment) Act, 1992 amends the Eighth Schedule to the Constitution to include which of the following languages? 1. Konkani 

    2. Manipuri 

    3. Nepali 

    4. Maithili 

    Select the correct answer using the code given below: 

    (a) 1, 2 and 3 (b) 1, 2 and 4 (c) 1, 3 and 4 (d) 2, 3 and 4

  • African Union Summit and Institutional Challenges

    Why in the News?

    The African Union (AU) held its annual summit in Addis Ababa, Ethiopia, amid rising conflicts, military coups, and governance crises across Africa, raising concerns about its effectiveness and enforcement capacity.

    About the African Union

    • Established in 2002, replacing the Organization of African Unity
    • Headquarters: Addis Ababa, Ethiopia
    • Members: 55 African countries
    • Objective: Promote unity, peace, security, democracy, and economic integration in Africa

    Key Institutional Features

    • Peace and Security Council (PSC): Conflict prevention and peacekeeping
    • African Charter on Democracy, Elections and Governance: Opposes unconstitutional changes of government
    • Provision to suspend members after military coups

    Current Challenges

    • 10 military coups since 2020 across Africa. AU has struggled to enforce its rule barring coup leaders from contesting elections. Ongoing conflicts in: Sudan, Democratic Republic of the Congo, and Sahel region insurgencies
    • Weak response to controversial elections in: Tanzania and Burundi
    • Financial constraints:
    • Missed self funding targets (2020, 2025)
    • Around 64 percent funding from external partners such as the US and EU

    Why is the AU Considered Weak?

    • Member states reluctant to grant strong enforcement powers
    • Dependence on external funding limits autonomy
    • Political divisions among members
    • Limited ability to intervene in internal conflicts
    [2023] In the recent years Chad, Guinea, Mali and Sudan caught the international attention for which one of the following reasons common to all of them? 

    (a) Discovery of rich deposits of rare earth elements 

    (b) Establishment of Chinese military bases 

    (c) Southward expansion of Sahara Desert 

    (d) Successful coups

  • As multilateralism erodes, India must reframe its foreign policy

    Why in the News?

    Global institutions are weakening as U.S.-China rivalry intensifies and countries increasingly take unilateral trade and security actions. The U.S. has bypassed WTO dispute systems and imposed tariffs, while China has expanded trade ties and is now the top trading partner for over 120 countries. The North Atlantic Treaty Organization’s (NATO) role is questioned, and the United Nations (UN) faces decision-making paralysis. Despite tensions, India remains heavily dependent on Chinese imports. The post-1991 liberal global order is fragmenting, forcing India to rethink strategic autonomy, diversify trade, and build domestic capacity. These shifts directly affect India’s trade, security, and diplomatic space.

    Introduction

    India’s foreign policy evolved from Non-Alignment to strategic autonomy within a multilateral, rule-based global order. The emerging order is increasingly transactional, alliance-driven, and technology-centric. This requires recalibration of India’s external engagement strategy.

    Why is Multilateralism Eroding?

    1. Institutional Paralysis: Multilateral institutions such as the UN and World Trade Organisation (WTO) face decision-making deadlocks, reducing enforceability of global norms. The WTO dispute settlement mechanism remains dysfunctional.
    2. Power Politics: Major powers prioritise bilateral leverage over multilateral commitments. The U.S. imposed unilateral tariffs despite WTO membership.
    3. Alliance Fragmentation: NATO’s unity faces internal divergence. Strategic competition overshadows collective security objectives.
    4. Economic Nationalism: Countries increasingly adopt protectionist measures. The U.S.-China trade war reflects departure from liberal trade principles.
    5. Decline of Global Consensus: Consensus-based diplomacy gives way to issue-based coalitions and minilateral frameworks.

    Is Strategic Autonomy Still Viable?

    1. Cold War Origins: Strategic autonomy emerged through the Non-Aligned Movement to preserve decision-making independence amid U.S.-Soviet bipolarity.
    2. Post-1991 Evolution: India retained autonomy while integrating into the liberal economic order, engaging the U.S., Russia, EU, BRICS, and Quad simultaneously.
    3. Operational Example: India purchased the Russian S-400 system despite U.S. CAATSA pressure and did not choose the U.S. Patriot system, demonstrating independent security choices.
    4. Multi-Alignment: Simultaneous engagement in Quad, BRICS, SCO, and continued defence ties with Russia reflect flexible alignment.
    5. Shrinking Multilateral Space: WTO paralysis and UN gridlock reduce institutional protection for balanced positioning.
    6. Capability Imperative: Autonomy is sustainable only if backed by manufacturing strength, technological capacity, and diversified trade. Strategic autonomy now requires material capability, not only diplomatic positioning. 

    How Is Power Politics Reshaping Global Relations?

    1. U.S.-China Rivalry: The U.S. CHIPS and Science Act (2022) restricts semiconductor exports to China; China advances “Made in China 2025” for tech self-reliance.
    2. Economic Coercion: The U.S. imposed Section 301 tariffs on China; Russia was excluded from SWIFT after the Ukraine war, showing finance as a strategic tool.
    3. Supply Chain Shift: The Indo-Pacific Economic Framework (IPEF) and “friend-shoring” aim to reduce dependence on China; Japan subsidised firms relocating from China.
    4. Minilateralism: The Quad and AUKUS operate outside universal platforms like the UN, focusing on strategic coordination.
    5. WTO Paralysis: The U.S. blocked Appellate Body appointments, disabling dispute settlement since 2019.

    What Challenges Does This Create for India?

    1. Trade Dependence: India remains significantly dependent on Chinese imports despite geopolitical tensions.
    2. Reduced Legal Recourse: WTO paralysis limits dispute resolution options.
    3. Technology Gaps: Dependence on external technology constrains strategic space.
    4. Dual Security Pressure: Border tensions and regional instability complicate balancing strategy.
    5. Development Linkage: External volatility directly affects growth ambitions.

    India must therefore shift from reactive diplomacy to structured strategic positioning.

    How Should India Reframe Its Foreign Policy?

    1. Endogenous Capacity: Strengthens domestic manufacturing and technological capability.
    2. Trade Diversification: Expands FTAs with EU, Africa, and emerging markets.
    3. Technology Partnerships: Deepens cooperation in AI, digital infrastructure, and cybersecurity.
    4. Pragmatic Regional Engagement: Stabilises neighbourhood relations through economic instruments.
    5. BRICS Repositioning: Aligns BRICS toward economic coordination rather than political bloc identity.
    6. Digital Currency Cooperation: Integrates official digital currencies to facilitate cross-border trade.
    7. Viksit Bharat 2047 Alignment: Links foreign policy with development milestones and economic transformation.

    Conclusion

    The erosion of multilateralism reflects structural transformation in global power distribution. India must recalibrate foreign policy toward endogenous capacity, diversified trade, and technology-driven growth. Strategic autonomy remains relevant but requires economic and technological foundations to remain credible.

    PYQ Relevance

    [UPSC 2019] “The long-sustained image of India as a leader of the oppressed and marginalised Nations has disappeared on account of its new found role in the emerging global order”. Elaborate.

    Linkage: It examines the evolution of India’s foreign policy from moral leadership of the Global South to pragmatic strategic positioning. It directly links to themes of eroding multilateralism and the shift from traditional strategic autonomy to interest-driven engagement in the emerging global order.

  • Pakistan Raises Indus Waters Issue over Sawalkot Dam

    Why in the News?

    Pakistan’s Foreign Office has stated that it has formally sought details from India regarding the Sawalkot Dam project, asserting that there will be no compromise on Pakistan’s water rights under the Indus Waters Treaty (IWT).

    Indus Waters Treaty (1960)

    Key Features

    • Signed in 1960 between:
      • India
      • Pakistan
      • Brokered by the World Bank

    River Allocation

    • Eastern Rivers (Exclusive use to India): Ravi, Beas and Sutlej
    • Western Rivers (Primarily for Pakistan, limited use to India): Indus, Jhelum and Chenab
    • India can build:
      • Run of the river hydroelectric projects
      • Non consumptive use projects
         But must share technical details with Pakistan.

    Sawalkot Dam Issue

    • Proposed on the Chenab River in Jammu and Kashmir.
    • Pakistan’s Indus Water Commissioner has written to India seeking:
      • Complete technical details
      • Design specifications
      • Compliance verification under IWT
    [2009] Consider the following statements: 1. The Baglihar Power Project had been constructed within the parameters of the Indus Water Treaty. 

    2. The project was completely built by the Union Government with loans from Japan and the World Bank. 

    Which of the statements given above is/are correct? 

    (a) 1 only (b) 2 only (c) Both 1 and 2 (d) Neither 1 nor 2

  • Have States gained from the 16th FC

    Why in the news?

    The 16th Finance Commission (FC) submitted its report for 2026-31, reopening debates on fiscal federalism. The 14th FC had raised vertical devolution from 32% to 42%, marking a structural shift. The 15th FC reduced it to 41% due to the reorganisation of Jammu and Kashmir into two Union Territories. Industrialised States demanded an increase to 50%, while several States sought restoration to 45-48%. The divisible pool has shrunk due to rising cesses and surcharges, which formed around 19% of gross tax revenue in 2015-16, leaving only 81% for distribution. The issue highlights tensions between equity-based redistribution and efficiency-based reward mechanisms.

    Introduction

    The 16th Finance Commission  chaired by Dr. Arvind Panagariya, submitted its final report to the President of India on November 17, 2025. Its recommendations, which cover the five-year period from April 1, 2026, to March 31, 2031, were accepted by the Union Government and tabled in Parliament on February 1, 2026

    What is the constitutional and institutional framework governing tax devolution?

    1. Article 270: Provides for distribution of net tax proceeds between Centre and States.
    2. Article 280: Mandates constitution of Finance Commission to recommend devolution formula.
    3. Divisible Pool: Includes corporation tax, personal income tax, Central Goods and Services Tax (CGST), and Centre’s share of Integrated GST.
    4. Exclusion of Cesses and Surcharges: These are not part of the divisible pool. In 2015-16, divisible pool constituted about 81% of gross tax revenue due to this exclusion.

    How has vertical devolution evolved over time?

    1. 13th FC (2010-15): Provided 32% share to States. Maintained specific transfers for Centrally Sponsored Schemes (CSS) with conditionalities.
    2. 14th FC (2015-20): Increased States’ share to 42%. Discontinued specific CSS transfers. Marked significant fiscal decentralisation.
    3. 15th FC (2020-26): Reduced share to 41% due to reorganisation of Jammu and Kashmir into Union Territories.
    4. 16th FC (2026-31): Retained 41% vertical devolution.

    What criteria guide horizontal devolution among States?

    13th FC Criteria:

    1. Income Distance (47.5%): Favoured poorer States to reduce fiscal disparities.
    2. Population (1971) (25%): Reflected demographic basis.
    3. Area (10%): Addressed administrative cost variations.
    4. Fiscal Discipline (17.5%): Incentivised prudent financial management.

    14th FC Criteria:

    1. Income Distance (50%): Increased equity emphasis.
    2. Population (1971) (17.5%) & Population (2011) (10%): Incorporated updated demographic data.
    3. Area (15%): Continued geographic consideration.
    4. Forest Cover (7.5%): Recognised ecological services.

    15th FC Criteria:

    1. Income Distance (45%): Slight reduction in redistributive weight.
    2. Population (2011) (15%): Sole population criterion.
    3. Area (15%) & Forest (10%): Maintained ecological compensation.
    4. Demographic Performance (12.5%): Incentivised population control.
    5. Tax Effort (2.5%): Rewarded revenue mobilisation.
    6. State’s Contribution to GDP (10%): Recognised growth contribution.

    What were the demands of States before the 16th FC

    1. Higher Vertical Share: Industrialised States such as Maharashtra, Gujarat, Tamil Nadu, Karnataka, and Telangana demanded an increase from 41% to 50%.
    2. Restoration Demand: Several States sought to increase to 45-48%.
    3. Inclusion of Cesses and Surcharges: States demanded their inclusion in the divisible pool.
    4. Cap on Cesses: Sought ceiling on Centre’s ability to levy cesses and surcharges.
    5. GDP Contribution Criterion: Industrialised States advocated inclusion of States’ contribution to GDP in horizontal devolution formula.

    What did the 16th FC recommend?

    1. Vertical Devolution: The share of states in the divisible pool of central taxes has been retained at 41%, the same level as the 15th Finance Commission
    2. Horizontal Devolution Formula: A new formula was introduced to determine how the 41% is divided among individual states. Horizontal Devolution Approach: is guided by two principles: Equity Consideration: Recognises need to address inter-State income disparities. And Efficiency Recognition: Gives due weight to States’ contributions to growth and fiscal performance. Notable changes include:
      1. Contribution to GDP: A new criterion with a 10% weight to reward states’ economic performance
      2. Income Distance: Weight reduced to 42.5% (from 45%).
      3. Population: Based on the 2011 Census, with a weight of 17.5%
      4. Forest & Ecology: Weight maintained at 10%, but now includes “open forests” and rewards increases in forest cover.
    3. Grants-in-Aid: Recommended total grants of ₹9.47 lakh crore over five years.
      1. Discontinued Grants: The Commission has stopped Revenue Deficit Grants (RDG), sector-specific grants, and state-specific grants
      2. Local Body Grants: ₹8 lakh crore allocated, split 60:40 between rural (₹4.4 lakh crore) and urban (₹3.6 lakh crore) bodies.
    4. Fiscal Roadmap:
      1. Centre’s Fiscal Deficit: Target to reduce to 3.5% of GDP by 2030-31.
      2. States’ Fiscal Deficit: Capped at 3% of GSDP.
      3. Off-Budget Borrowings: Recommended a strict end to off-budget borrowings for both Centre and States. 

    What are the broader fiscal implications?

    1. Redistribution vs Incentives: Higher income distance weight benefits poorer States; GDP contribution and tax effort reward growth-oriented States.
    2. Shrinking Divisible Pool: Rising cesses reduce effective devolution.
    3. Union Fiscal Needs: Increased defence and infrastructure expenditure cited as constraints.
    4. State-Level Reforms: Recommends subsidy targeting, power sector reforms, and fiscal deficit control.

    Conclusion

    The 16th Finance Commission retains the 41% vertical devolution, maintaining continuity with the 15th FC despite demands for expansion. It upholds constitutional limits on cesses and surcharges while balancing equity through income distance and efficiency through recognition of States’ GDP contribution and fiscal performance. The recommendations reflect calibrated fiscal federalism, where redistribution, growth incentives, and Union fiscal requirements coexist within constitutional boundaries.

    PYQ Relevance

    [UPSC 2020] Explain the rationale behind the Goods and Services Tax (Compensation to States) Act of 2017. How has COVID-19 impacted the GST compensation fund and created new federal tensions?

    Linkage: The question directly connects to the debate on shrinking divisible pool, rising cesses and surcharges, and the resulting Centre-State fiscal tensions that frame the discussion on vertical devolution and fiscal federalism.