Why recent macro fiscal shifts call for a reassessment of FC16 projections

In brief

• Several macro‑fiscal developments following the submission of the FC16 report in November 2025 have materially altered growth assumptions, and the projected trajectories of revenues, deficits, and debt for both the union and states.
• The reassessment indicates that the GoI is likely to remain in revenue deficit throughout the award period, with fiscal deficits and debt‑GDP ratios remaining elevated, implying a challenging fiscal consolidation path.
• At the aggregate level, states are projected to remain in revenue deficit throughout the FC16 award period, contrary to FC16’s projection of revenue surpluses FY28 onwards.  

The Sixteenth Finance Commission (FC16) submitted its report in November 2025, at a time when several important policies and macroeconomic changes were already underway or imminent. These include:

• Major GST reforms (GST 2.0) – involving substantial revenue sacrifice by both the Union and states, which had been implemented prior to the submission of FC16 report.
• Presentation of GoI FY27 Budget – with revised baseline assumptions relating to growth, tax buoyancy and expenditure priorities, even before the commencement of FC16 award period in FY27.
• Revisions to national income accounts, along with saving-investment profiles.
• Changes in subsidy requirements, especially owing to the West Asian crisis.
• Heightened global uncertainty affecting growth assumptions.

These developments have materially altered the profiles of revenue and fiscal deficits and debt relative to GDP/GSDP for both GoI and the aggregate of states since the submission of the FC16 report. In view of these developments, we reassess the FC16 projections of central and state finances in two parts: 

• Initial changes: Incorporating Union budget FY27 fiscal impact including the GST 2.0 impact on union and state finances
• Reassessment: Additionally incorporating the impact on the fiscal aggregates of the new national accounts series with 2022-23 as the base year. 

Incorporating the effects of critical recent developments: FC16 vs. revised fiscal outlook 

Beyond the union budget FY27’s fiscal impact, several critical developments have further altered the fiscal landscape. A major change has been the release of a new national accounts series with 2022-23 as the base year. However, FC16’s projections were anchored to the 2011-12 base series of national accounts. The revised series reflects a lower level of nominal GDP, with implications for the tax base and for fiscal ratios relative to GDP. 

The new GDP series necessitates adjustments to both the base-year magnitude and the assumed growth path. Given the lower nominal GDP levels and slower growth during FY23–26, we assume a nominal GDP growth rate of 10.0% for the projection period, compared to the 11.0% assumed by FC16. Alongside, central tax buoyancies, particularly for CGST, have been revised downward to account for the revenue effects of GST 2.0. Lower buoyancies translate into slower growth of the divisible pool and lower tax devolution to states in absolute terms. In addition, the second supplementary demand for grants for FY26 has been incorporated, raising GoI expenditure and creating carryover effects through higher deficits, debt, and interest payments in the subsequent years. Table 1 shows that the GoI remains in revenue deficit throughout the award period, in contrast to FC16’s projection of a revenue surplus in the terminal year. Revenue deficits are materially higher than projected, while fiscal deficits and the debt to GDP ratio remain elevated and decline more slowly, pointing to a more challenging fiscal consolidation environment.

A similar reassessment was undertaken for state finances. FC16 projections are available for the aggregate of all states and for a limited set of aggregates, rather than for individual states.

Accordingly, our analysis draws on information from the FY27 Union Budget, particularly with respect to central transfers to states, while largely retaining FC16’s underlying assumptions. Three key modifications are introduced: a) updated estimates of transfers from the GoI based on the FY27 Budget; b) a decomposition of state own tax revenue into SGST and non SGST components to capture the impact of GST 2.0 on SGST collections; and c) a re estimation of interest payments. In addition, the new GDP series is incorporated. Together, these changes result in materially different projections for the aggregate fiscal position of states, especially with respect to fiscal imbalance indicators. As shown in Table 2, states at the aggregate level are in revenue deficit in all years in contrast to the FC16 projections of revenue surplus FY28 onwards. Thus, FC16’s recommendation regarding abolition of Article 275 grants, also referred to as revenue deficit grants (RDG), which was informed by their assessment of revenue surplus for the states in aggregate, in their projections, is belied.

Fiscal consolidation and the saving-investment balance in India: Need for reassessment of FRBM norms

FC16 does not provide a comprehensive assessment of the fiscal sustainability of central and state government debt and deficits, limiting its analysis largely to projections using selected trends. The report also does not present a state wise assessment of fiscal sustainability. This is notable given that the Constitution, under Article 280, mandates the FC to make recommendations in the interests of ‘sound finance.’ It may be recalled that the fiscal sustainability framework developed by FC12 explicitly linked sustainability analysis to the supply of and demand for investible resources in the economy, which in turn is linked to sectoral saving-investment imbalances. In particular, the household sector is the only surplus sector in the system and its surplus financial savings supplemented by net inflow of capital from abroad, provides the investible surplus from which the public sector including the general government and the private corporate sector draw resources in order to meet their deficits.

The new saving-investment series reveals important changes in the saving-investment profiles of different sectors when compared to those in 2003, when debt and fiscal deficit rules were framed for the GoI and states. As shown in Table 3, household savings in financial form have fallen significantly from their levels in FY04. In FY25, according to the new 2022-23 base series, total investible resources fell to 7.7% of GDP. Out of this, the public sector’s net claim was 5% of GDP and that of the private corporate sector was 0.7%. The net claim of the public sector includes central and state government fiscal deficits amounting to 7.8% of GDP, implying that the non-government public sector had some surplus saving that provided a margin for some adjustment. These trends underscore the need to reassess the sustainable level of the general government deficit, comprising GoI and states, in the context of fiscal sustainability framework.

Using the modified profiles of sectoral surpluses and deficits, the total fiscal space available for borrowing amounts to 8.0% of GDP, comprising surplus household sector financial savings of about 7% of GDP and net foreign capital inflow of 1.0% of GDP. If the combined fiscal deficit of central and state governments claims 6.0% of GDP, only 1.0% borrowing space will be left for the private corporate sector and non-government public sector each. Two considerations are pertinent: 1) whether the household financial savings at 7.1% of GDP are likely to be maintained in future; 2) whether the nominal GDP growth at 11% can be maintained in the medium-term given recent trends of this growth being below 10%. In order to provide a borrowing space for the private corporate sector, higher than 1% of GDP, it may be appropriate to reconsider FRBM norms and examine whether there is a need to bring down the general government fiscal deficit target to below 6% of GDP. Combining the relevant fiscal deficit target and nominal GDP growth may also lead to revision of the sustainable debt-GDP level. FC16 did not consider the sustainability norms consistent with these emerging conditions, as required in the interest of ‘sound finance’ under Article 280 of the Constitution.