Karnataka is poised to emerge as the largest beneficiary of the 16th Finance Commission’s horizontal devolution framework, while Madhya Pradesh is projected to face the sharpest relative reduction, according to assessments of the formula’s draft weightings for the 2026–31 award period. The recalibration is expected to significantly alter how the Centre’s divisible tax pool is shared among states, with fiscal outcomes closely tracking demographic performance, tax effort and income distance.Under the revised formula, Karnataka’s share of central tax devolution rises to 4.13% for 2026–31 from 3.65% under the 15th Finance Commission. Based on current projections of the divisible pool, this translates into an additional ₹7,387 crore over the five-year period, lifting the state’s estimated allocation to about ₹63,050 crore, compared with ₹55,663 crore it would have received under the previous framework. The increase positions Karnataka as the biggest gainer in absolute terms among large states.
The adjustment reflects a broader shift in how the Finance Commission balances equity and efficiency. While income distance remains a core criterion, the 16th Commission has signalled a greater emphasis on parameters such as demographic performance, forest and ecology, and tax effort. Karnataka’s relatively strong performance on population stabilisation, higher own-tax mobilisation and expanding economic base appear to have worked in its favour, offsetting the traditional disadvantage faced by comparatively higher-income states.
For Madhya Pradesh, the outlook is less favourable. Projections indicate the state could absorb the largest proportional hit among major recipients as the formula recalibrates income distance and moderates the weight accorded to population figures based on older census data. While the state continues to benefit from redistribution due to lower per capita income, the relative advantage narrows as the formula rewards states that demonstrate stronger fiscal effort and demographic outcomes.
Officials familiar with the Commission’s approach say the changes aim to reduce long-term structural distortions in inter-state transfers. The emphasis on tax effort is designed to incentivise states to broaden their revenue base rather than rely heavily on central transfers. Demographic performance, measured through population control indicators, seeks to recognise states that have invested in health and education to slow population growth.
Karnataka’s fiscal profile aligns with these objectives. The state has consistently ranked among the top contributors to the Centre’s gross tax revenues, driven by a diversified economy spanning information technology, manufacturing and services. Its own-tax revenue growth has outpaced the national average in several years, strengthening the argument that states contributing more to the national exchequer should not see a persistent erosion in their relative share of devolved funds.
The proposed redistribution has also sharpened political debate. Leaders in states facing reduced shares argue that abrupt shifts in the devolution formula could strain budgets already stretched by welfare commitments and infrastructure needs. Supporters counter that a rules-based framework must evolve to reflect changing economic realities and policy priorities, particularly when demographic trends diverge sharply across regions.
The Centre has maintained that the Finance Commission operates independently and that its recommendations are guided by constitutional principles rather than political considerations. Still, the scale of the projected gains and losses underscores the high stakes involved. For Karnataka, the additional inflows could provide fiscal headroom for capital expenditure, urban infrastructure and social sector programmes at a time when states are being encouraged to prioritise growth-enhancing investments.