16th Finance Commission reviews Nagaland’s finances, expresses concern over deficit

KOHIMA — The 16th Finance Commission (FC), led by Chairman Arvind Panagariya, continued its consultations with state governments, meeting with Nagaland officials in Kohima on Tuesday.

Following the meeting at Hotel Vivor, the commission addressed a press conference during which Panagariya explained that the 16th FC, operational since January 2024, is tasked with submitting its final report to the Government of India by October 2025. These state visits, with Nagaland being the tenth, are crucial for understanding local economic needs and concerns.

The meeting included discussions with Chief Minister Neiphiu Rio, Deputy Chief Ministers, Cabinet members, and senior bureaucrats. He said the chief minister outlined Nagaland’s fiscal challenges and specific needs, supplemented by presentations from the chief secretary and additional chief secretary on the state’s economic evolution and current financial standing.

Panagariya emphasised the commission’s mandate to recommend both vertical devolution (resource division between Centre and states) and horizontal devolution (allocation among states) based on criteria like income, population, land area, and ecological concerns.

Also view:

He added that the commission also advises on grants to local bodies from the Consolidated Fund of India, as well as disaster relief and sector-specific grants, such as those earmarked for education or health, through centrally sponsored schemes.

Nagaland’s recommendations

Among the recommendations put forth by the government of Nagaland during the consultation, a primary concern was the inclusion of certain cesses and surcharges, currently retained entirely by the central government, in the divisible pool. The state argued that the increasing share of these cesses in central revenue has significantly impacted state finances and proposed sharing them to offset these losses.

Regarding horizontal devolution, the state government recommended adjusting the existing criteria, including increasing the forest and ecology allocation from 10% to 15%, using forest coverage relative to total land area as a criterion. Reasoning that a larger proportion of forest land leaves less area available for other economic activities, the state viewed that this factor ought to be taken into consideration.

While maintaining existing demographic criteria, the state proposed a new “disability index” to account for Nagaland’s specific geographical and economic challenges, such as the increased costs associated with its hilly terrain.

Additionally, recognising the need for capital project support, particularly after the Planning Commission’s dissolution, Nagaland requested “capital deficit grants” alongside the traditional revenue deficit grants, a novel proposal for the Finance Commission.

The state government also proposed several project-specific grants to the Finance Commission, focusing on initiatives such as the establishment of an airport, the Foothill Road, renewable energy projects, hydropower generation, and mineral exploration.

High fiscal deficit

While reserving detailed comment on Nagaland’s recommendations until the Commission gathers information from other states, Chairman Panagariya expressed concern about the state’s significant fiscal deficit and high debt-to-GSDP ratio, which pose challenges to its macroeconomic stability. He noted that while these fiscal challenges are pressing, they are not unique to Nagaland, as other states face similar imbalances. The commission, he said, is likely to issue broader recommendations addressing these nationwide fiscal concerns.

Responding to a question about Nagaland’s “special category” status, Panagariya clarified that this designation, previously linked to Planning Commission grants, is less relevant now. However, he said that Nagaland continues to receive preferential treatment under centrally sponsored schemes, with a 90% central contribution compared to the typical 60% for other states.

He went on to state that though Nagaland relies significantly on central funding, the state is making efforts to increase its own revenue generation. The commission generally encourages such efforts as they contribute to a stronger GSDP and higher per capita incomes, he said, adding that the FC would support measures that reinforce this growth-driven approach.

Related: 16th Finance Commission begins four-day visit to Nagaland