Hence, while suggesting the fiscal glide path for both governments for FY27-FY31, the Commission has penciled in a combined fiscal deficit of 6.5%, with the Centre gradually reducing it to 3.5% and states maintaining it at 3% annually, starting next fiscal.
The Commission also said the eventual 3.5% fiscal deficit of the Centre will include a 0.5% impact due to the 50-year interest-free loans given to states for capital expenditure. While the 3% annual fiscal deficit of states will exclude the impact of interest-free loans.
“With states maintaining a revenue balance, a combined deficit of 6.5% fiscal deficit for the Union and States, including 0.5% of on‑lending by Union to states for capital expenditure, would be required to achieve the desired level of capital expenditure,” the Finance Commission said in its report.
Currently, states are allowed additional borrowing for meeting capex targets, which is over and above their normal fiscal deficit limit of 3%.
For FY27, the 16th Finance Commission suggested a fiscal deficit aim of 4.2% for the Centre, followed by a 0.2% reduction in the deficit every year till FY30 and then a 0.1% reduction in FY31 to reach the deficit aim of 3.5%.
However, against the 4.2% fiscal deficit aim suggested by the Finance Commission, the Centre has decided to reduce it by 0.1% to 4.3% in FY27, as announced in the Union Budget.
As per the RBI, the state’s fiscal deficit is projected at 3.3% in FY26; due to the impact of interest-free loans, it’s at 2.8%.
The 16th Finance Commission also said if the Centre can bring the deficit down to 3.5% by FY31, its debt will also shrink to 47.6% of the GDP. This debt-GDP projection is again in contrast to the Centre’s aim of reducing it to 50% +/-1% of the GDP by FY31.
First Published: Feb 2, 2026 7:38 AM IST
