By Moa Jamir
The Sixteenth Finance Commission’s (16th FC) award for the period 2026–27 to 2030–31 signals a deeply unsettling shift in Nagaland’s fiscal trajectory, one that removes long-standing safeguards while exposing the State’s limited capacity to absorb financial shocks. The reduction in Nagaland’s share of the divisible pool of central taxes—from 0.573% under the 15th FC to 0.481% under the Sixteenth—may appear marginal on paper, but in relative terms it represents a cut of nearly 16% in assured tax devolution, translating into hundreds of crores in foregone revenue over the five-year award period.
More damaging still is the proposed discontinuation of Post-Devolution Revenue Deficit Grants (RDGs). In the 15th FC covering 2021–22 and 2025–26, Nagaland was awarded Rs 21,249 crore as RDG, averaging average annual support of over Rs 4,200 crore along with Rs 525 crore in State-specific grants. These transfers formed the backbone of the State’s revenue account and their withdrawal, without any transition or replacement mechanism, represents a fiscal cliff rather than a gradual adjustment.
The Commission’s argument that revenue deficits arise from committed expenditure and weak reform incentives may hold for fiscally stronger States, but its uniform application ignores Nagaland’s structural constraints. With an Own Tax Revenue to GSDP ratio of just 5.5%, among the lowest in the country, the State lacks the economic depth to rapidly compensate for such losses. At the same time, Nagaland ranks among the most transfer-dependent States in India, relying heavily on devolution and grants to fund routine governance. Removing RDGs in this context risks forcing abrupt expenditure compression rather than incentivising reform.
Recent fiscal discipline, often cited as evidence of improving health, must also be read cautiously. The accumulated budget deficit declined from Rs 2,212.74 crore in 2022–23 to Rs 1,374.17 crore in 2023–24 (BE), and further to Rs 878.57 crore in revised estimates. However, these improvements occurred within a fiscal framework still supported by RDGs and generous central transfers. Once those supports are withdrawn, sustaining this trajectory will become significantly harder.
It is against this backdrop that Chief Minister Neiphiu Rio’s decision to lead a high-level delegation to New Delhi acquires particular weight. His meetings with Union Ministers, including Minister Nirmala Sitharaman, were not symbolic gestures but highlights the seriousness and adverse ramification on the State’s financial health over the loss of inflows. By invoking the 16-Point Agreement, under which the Government of India undertook to bear the cost of administration and development from the Consolidated Fund, the Chief Minister has framed the issue as a dilution of a foundational political understanding, not merely a dispute over grants.
Meanwhile, the alternatives available to the State remain stark. Nagaland’s own tax and non-tax revenue was projected to rise from Rs 1,950.56 crore in 2023–24 to Rs 2,250.05 crore in 2024–25, an increase of about Rs 300 crore. Even if fully realised, however, this increment barely offsets a fraction of the annual RDG support the State stands to lose. Local body grants under the 16th FC, amounting to Rs 1,364 crore over five years, are tightly conditional, performance-linked and earmarked, offering little flexibility to bridge State-level revenue gaps.
The implication is unavoidable. Nagaland cannot rely on incremental adjustments to survive the post-16th FC fiscal regime. Expanding the tax base, improving compliance, rationalising subsidies and revisiting long-avoided policy constraints will become unavoidable. In a State where avenues for revenue generation are narrow, politically sensitive issues, such as the fiscal efficacy of the prohibition regime under the NLTP Act, are likely to re-enter policy debate, not by choice but by compulsion. Without decisive action to strengthen its own revenue base, that stress will only intensify. What remains to be seen is whether the State will undertake timely course correction to navigate this fiscal reckoning.
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