What is the common examiner trap about Economy in UPSC exams?

They may ask which Finance Commission dropped revenue deficit grants (16th FC) or confuse it with the 15th FC which continued them. Another trap is asking which article deals with the divisible pool (Article 270) versus which article establishes the Finance Commission (Article 280).

What should UPSC aspirants remember about Economy for Prelims?

1. Target this Nodal Body: 16th Finance Commission (Constitutional Body under Article 280) 2. Target this Legal Point: Article 270 (Cesses & Surcharges not part of Divisible Pool) 3. Target this Key Critic: C. Rangarajan (Former RBI Governor)

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Ex-RBI Governor Rangarajan Critiques 16th FC Report, Calls Out Rising Cesses & Surcharges, Opposes Dropping Revenue Deficit Grants

Q: Under which Article of the Indian Constitution is the Finance Commission established?

Article 280, The Finance Commission is a constitutional body established under Article 280 of the Indian Constitution. Its primary function is to recommend the distribution of financial resources between the Union and the States.

Q: Consider the following statements regarding the critique by former RBI Governor C. Rangarajan on the 16th Finance Commission report: 1. He argued that the steep increase in cesses and surcharges is not in the spirit of the Constitution. 2. He praised the Commission for taking a pragmatic short cut by dropping revenue deficit grants. 3. He emphasized that normatively determined revenue gap grants are essential for India's federal structure. Which of the statements given above is/are correct?

Both 1 and 3, Statement 1 is correct as per the article where Rangarajan states the rise in cesses/surcharges 'is not in the spirit of the Constitution'. Statement 2 is incorrect; he criticized the dropping of grants as a 'short cut', not praised it. Statement 3 is correct as he said such grants 'have a place in federal structure'.

Q: Which Finance Commission's report was critiqued by former RBI Governor C. Rangarajan in the news article?

16th Finance Commission, The article's title and content explicitly mention that the critique is directed at the report of the 16th Finance Commission. The 15th FC was the previous commission, and the 17th FC is yet to be constituted.

Q: What is the primary constitutional concern raised by C. Rangarajan regarding cesses and surcharges levied by the Centre?

They are not part of the divisible pool of taxes, reducing states' share of central revenues., The core concern, as implied by Rangarajan's statement and rooted in Article 270, is that cesses and surcharges are retained entirely by the Central Government and not shared with states. This reduces the size of the divisible pool, thereby diminishing the financial resources available for devolution to states.

Economy PolityHIGH

Target:UPSC GS-IIIMPSCSSC GAPrelims MediumMains HighStatic GK Link

25 Feb 2026

~2 min

Source: The Hindu

Bodies:Finance CommissionRBI

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~2 min · Quick mode

What This Article Covers

1.Former RBI Governor C. Rangarajan critiques the 16th Finance Commission's report for not addressing the steep increase in cesses and surcharges, calling it 'not in the spirit of the Constitution'.

2.He criticizes the Commission's 'short cut' of dropping revenue deficit grants altogether, arguing such normatively determined grants are essential for a federal structure.

3.This expert opinion highlights a key debate in fiscal federalism and provides a critical perspective for UPSC mains questions on Finance Commissions and Centre-State financial devolution.

The Big Picture

Prelims · MediumMains · High

Former RBI Governor C. Rangarajan has raised significant constitutional and structural concerns regarding the 16th Finance Commission's approach. His critique focuses on the unchecked rise of cesses and surcharges, which erode state finances, and the Commission's decision to discontinue revenue deficit grants, undermining fiscal federalism. This analysis provides crucial fodder for mains answers on Centre-State financial relations.

Exam Lens

Quick Exam Facts From News

Finance Commission16th Finance Commission

Key CriticC. Rangarajan, Former RBI Governor

Core Constitutional ConcernRising Cesses & Surcharges

Key Recommendation CritiquedDropping Revenue Deficit Grants

1-Minute Revision

›Finance Commission: 16th Finance Commission
›Key Critic: C. Rangarajan, Former RBI Governor
›Target this Nodal Body: 16th Finance Commission (Constitutional Body under Article 280)
›Target this Legal Point: Article 270 (Cesses & Surcharges not part of Divisible Pool)
›Target this Key Critic: C. Rangarajan (Former RBI Governor)

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News Snapshot

⚖️

Constitutional Spirit Violated

Rangarajan argues the steep rise in cesses and surcharges is not warranted and violates the spirit of the Constitution by reducing the divisible pool for states.

📉

Grants Dropped

The 16th Finance Commission took the shortcut of dropping revenue deficit grants altogether, which Rangarajan criticizes as detrimental to fiscal federalism.

🏛️

Federal Structure

The critique emphasizes that normatively determined revenue gap grants and equalisation grants have a fundamental place in India's federal fiscal structure.

Detailed Analysis & Strategic Depth

Context / Background

Finance Commissions, constitutional bodies under Article 280, are pivotal in determining vertical (Centre to States) and horizontal (among States) devolution of tax revenues. The 15th FC continued revenue deficit grants, making the 16th FC's reported move to drop them a significant departure. The increasing reliance on cesses and surcharges, which are not part of the divisible pool, has been a long-standing grievance of states, reducing their share of central taxes.

Core Analysis & Implications

Rangarajan's critique hits two critical nerves of fiscal federalism. First, cesses and surcharges allow the Centre to raise revenue without sharing it with states, contravening the cooperative federalism principle. Second, eliminating revenue deficit grants undermines the equalisation principle, potentially widening inter-state disparities. This move could force fiscally weaker states into a debt trap or force cuts in essential welfare expenditure, affecting equitable development.

Future Outlook / Way Forward

This expert dissent will fuel political and academic debate before the 16th FC's final report is submitted. It pressures the Commission to reconsider its stance or provide robust justification. For aspirants, this signals potential essay and mains questions on the challenges to fiscal federalism, the role of Finance Commissions, and the need for a stable and predictable resource-sharing mechanism between the Centre and States.

Key Facts at a Glance

Finance Commission16th Finance Commission

Key CriticC. Rangarajan, Former RBI Governor

Core Constitutional ConcernRising Cesses & Surcharges

Key Recommendation CritiquedDropping Revenue Deficit Grants

You've read the full analysis. Now test your understanding.

Practice exam-style questions based on this article.

Q1Static LinkageEasyUPSC, SSC, State PSC

Under which Article of the Indian Constitution is the Finance Commission established?

Q2Statement-basedHardUPSC

Consider the following statements regarding the critique by former RBI Governor C. Rangarajan on the 16th Finance Commission report:

1. He argued that the steep increase in cesses and surcharges is not in the spirit of the Constitution.

2. He praised the Commission for taking a pragmatic short cut by dropping revenue deficit grants.

3. He emphasized that normatively determined revenue gap grants are essential for India's federal structure.

Which of the statements given above is/are correct?

Q3Data-centricMediumUPSC, SSC, State PSC

Which Finance Commission's report was critiqued by former RBI Governor C. Rangarajan in the news article?

Q4Application/ImpactMediumUPSC, State PSC

What is the primary constitutional concern raised by C. Rangarajan regarding cesses and surcharges levied by the Centre?

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Ex-RBI Governor Rangarajan Critiques 16th FC Report, Calls Out Rising Cesses & Surcharges, Opposes Dropping Revenue Deficit Grants

Exam Lens

Quick Exam Facts From News

1-Minute Revision

News Snapshot

Constitutional Spirit Violated

Grants Dropped

Federal Structure

Detailed Analysis & Strategic Depth

Context / Background

Core Analysis & Implications

Future Outlook / Way Forward

Prelims Flashpoints

Key Facts at a Glance