New Delhi signalled a firm stance on fiscal devolution as the Union Budget for 2026–27 retained states’ share of central taxes at 41%, setting aside calls from several state governments for a higher transfer to ease budgetary stress. Presenting the Budget, Union Finance Minister Nirmala Sitharaman confirmed an allocation of ₹1.4 lakh crore under tax devolution, keeping the formula unchanged for another year and reinforcing the Centre’s emphasis on fiscal consolidation.The decision rebuffs sustained lobbying by M. K. Stalin, who had pressed for an increase to 50%, arguing that the existing framework disadvantages industrialised states that contribute a larger share to the tax pool. Tamil Nadu’s leadership has framed the issue as one of equity, contending that rising social spending, infrastructure commitments and debt servicing obligations require a recalibration of Centre–state transfers.
While announcing the figures, Sitharaman underlined the government’s commitment to predictable transfers and macroeconomic stability, pointing to the need to balance welfare spending with investment-led growth and debt management. Officials familiar with the Budget process said the Centre is wary of altering the devolution ratio mid-cycle, citing the importance of policy certainty for both Union and state finances.
States seek larger slice of tax pool — the pushback from Chennai reflects a broader debate playing out across federal India, where states have flagged narrowing fiscal space amid expanding responsibilities. Over the past decade, states have taken on greater roles in health, education and urban infrastructure, even as cesses and surcharges collected by the Centre have risen, funds that are not shared under the divisible pool. Critics argue this trend effectively compresses the resources available to states despite a headline devolution rate of 41%.
Tamil Nadu’s case has been sharpened by its relatively strong tax effort and economic output, factors the state says are insufficiently rewarded under current formulas that weigh population and income distance. State officials maintain that higher devolution would not only improve fiscal autonomy but also reduce dependence on discretionary grants and centrally sponsored schemes.
The Centre, however, has countered that the 41% share already represents a significant increase from earlier periods and that the overall flow of funds to states includes grants, scheme transfers and borrowings. Budget documents show that while the devolution ratio remains unchanged, capital outlays and scheme-linked transfers continue to form a sizeable component of state financing, albeit with tighter conditionalities.
The issue has also been shaped by recommendations of the Fifteenth Finance Commission, which set the 41% benchmark after accounting for the creation of the Union Territory of Jammu and Kashmir. Any revision, officials note, would typically await the next Finance Commission cycle rather than be addressed through an annual Budget.
Political reactions were swift. Leaders from opposition-ruled states echoed Tamil Nadu’s concerns, warning that static devolution risks widening regional disparities. Supporters of the Centre’s approach argued that uniform transfers and fiscal discipline are essential to sustain national growth and manage deficits, particularly as public investment remains a policy priority.
Economists say the standoff highlights structural tensions within India’s fiscal federalism. Some point to the growing reliance on cesses as a flashpoint, suggesting that a broader review of revenue-sharing mechanisms may be needed to restore trust between tiers of government. Others caution that abrupt changes to devolution could complicate deficit targets and investor confidence, especially at a time when global conditions remain uncertain.