MAINS Current Affairs includes FM Tables 16th Finance Commission Report & India–US Signed Trade Agreement

Polity

1. FM Tables 16th Finance Commission Report

Content: The 16th Finance Commission, constituted in 2023 under the chairmanship of Dr. Arvind Panagariya has had its key recommendations accepted by the Government for implementation during 2026–27 to 2030–31.

What is the Finance Commission?

• Constitutional Body:Established under Article 280 of the Indian Constitution.
• Formation:Constituted by the President of India every five years (or earlier).
• Composition: A Chairman and four other members.
• Core Function:It serves as a balancing wheel of fiscal federalism by recommending:
  • Vertical Devolution: The distribution of net tax proceeds between the Centre and the States.
  • Horizontal Devolution:The allocation of these proceeds among the States themselves.
  • Grants-in-Aid: Principles governing financial assistance to States from the Consolidated Fund of India (Article 275).
  • Local Bodies:Measures to augment State Consolidated Funds to support Panchayats and Municipalities.
• Nature of Recommendations: Advisory (not legally binding), though traditionally accepted by the Government.
• Note:Cesses and surcharges levied by the Centre are not part of the divisible pool.

Key Highlights

• Vertical Devolution (Tax Sharing):
  • Retained at 41%:The Commission recommended keeping the states’ share of the divisible tax pool at 41% (the same as the 15th FC).
  • The “Grand Bargain” Proposal:The report highlighted that while the share is 41%, the actual pool has shrunk because the Centre’s cesses and surcharges (which are not shared) have risen. It suggests folding these into the regular tax pool in the future.
• Disaster Management Grants:
  • New Disasters:The 16th FC recommended including Heatwaves and Lightning in the list of nationally notified disasters, allowing states to access central funds for these events.
  • Total Corpus:Rs 2,04,401 crore for the five-year period.
  • Allocation:80% to the State Disaster Response Fund (SDRF) and 20% to the State Disaster Mitigation Fund (SDMF).
• Grants to Local Bodies:
  • Total Allocation: Rs 7,91,493 crore for rural and urban local bodies.
  • Performance Linked: Grants are split into Basic (80%) and Performance (20%) components.
  • Urbanization Premium:A Rs 10,000 crore fund to incentivize the merger of peri-urban villages into larger Urban Local Bodies (ULBs).
• Fiscal Roadmap:
  • State Deficit:Recommended capping states’ fiscal deficit at 3% of GSDP.
  • Union Deficit: A target to bring the Union’s fiscal deficit down to 3.5% of GDP by FY31.
  • End of Revenue Deficit Grants:Unlike previous commissions, the 16th FC has discontinued Post-Devolution Revenue Deficit Grants, urging states to improve their own tax administration.

International

2. India–US Signed Trade Agreement

Context: India and the United States have announced a new trade deal, lowering tariffs and setting ambitious targets for bilateral trade.

• In August 2025, the US had levied tariffs up to 50% (25% reciprocal + 25% additional duty) linked to India’s Russian oil imports.

About the India–US Trade Deal

• Tariff reduction: US reciprocal tariffs on Indian goods reduced from 25% to 18%, effective immediately.
  • Additional 25% duty withdrawn, which had earlier been imposed.
• US claims on broader commitments:The US asserts the deal includes zero tariffs and non‑tariff barriers for US goods and that India committed to buy over $500 billion of US products across energy, tech, agriculture, coal, etc.
  • India will progressively reduce tariffs and non-tariff barriersagainst US goods.

Importance of the Deal

• It strengthens India–US tiesamid global geopolitical shifts, especially regarding China.
  • Helps counterChina’s dominance in global trade and manufacturing.
• Lower tariffs could improve competitiveness for Indian exporters (farmers, MSMEs, entrepreneurs) and attract investment.
  • This would support Make, Design and Innovate in India for the world.
• Diversifying oil imports may reduce India’s dependence on Russia, though at higher costs.
• It would help stabilize therupee amid global economic uncertainty.
• It will position India as a key partner in US-led trade and security frameworks.

Challenges 

• India faces multiple challenges in trade and energy: domestic opposition limits opening agricultural markets to US imports, halting discounted Russian crude would raise energy costs and strain refiners, and higher US H-1B visa fees hinder Indian IT professionals, with services issues unaddressed in trade deals.
• Additionally, US threats of tariffs on Iran trade have forced India to scale back trade and pause Chabahar port investment.

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