Vishleshan for Regulatory Exams, 6th August 2025: 16th Finance Commission & PMI Highlights

Want to get ready for the UPSC, RBI, SEBI, or NABARD exam? If yes, you have to stay updated about key economic and regulatory updates. In today’s edition of Vishleshan, we’ll discuss 16th Finance Commission & PMI Highlights. These issues are highly relevant for all the upcoming competitive exams mentioned above. Keep reading to stay ahead with a clear understanding of these current updates.

Role of 16th Finance Commission in Climate Governance

Context: The panel could go beyond its traditional role in tax devolution to Indian states and push for a national carbon accounting framework, among other reforms aimed at climate action. Here’s the outline of a green plan.

Link to the Article: Mint

The 16th Finance Commission (FC) is facing a critical opportunity to move beyond its traditional tax devolution criteria and institutionalize climate-responsive governance in India. As climate change poses “polycrisis” proportions of worry, there is a pressing need to align the country’s fiscal architecture with its climate goals. This can be achieved through suggestions like creating national and state-level carbon accounting authorities, modifying devolution criteria to include “climate and disaster proofing initiatives,” and granting states the power to levy a green tax.

Finance Commission:

The Finance Commission is a constitutional body in India established under Article 280 of the Indian Constitution. Its primary function is to recommend the distribution of financial resources between the central government and the state governments.

• Purpose: The Finance Commission serves as a key mechanism for maintaining fiscal federalism in India. It aims to address the vertical imbalance (Centre’s higher revenue-raising capacity vs. states’ higher expenditure responsibilities) and horizontal imbalance (disparities among states’ fiscal capacities).
• Constitutional Provisions (Article 280): Article 280 mandates the President to constitute a Finance Commission every five years (or earlier if needed) to make recommendations on:
  • The distribution of net proceeds of taxes between the Union and the States (vertical devolution) and the allocation of the states’ respective shares among them (horizontal devolution).
  • The principles governing grants-in-aid of the revenues of the States out of the Consolidated Fund of India.
  • Measures to augment the Consolidated Fund of a State to supplement the resources of Panchayats and Municipalities based on the recommendations of the State Finance Commission.

15th Finance Commission (15th FC)

• Composition and Tenure: The 15th FC was constituted on 27th November, 2017, and was chaired by Mr. N. K. Singh. It made recommendations covering a period of six years commencing on 1st April, 2020, through its Interim and Final Reports, which are valid up to the financial year 2025-26.
• Devolution Criteria: The 15th FC recommended a vertical devolution of 41% of the divisible pool of central taxes to the states. For horizontal devolution, it used six criteria: Income Distance, Area, Population (2011), Demographic Performance, Forest and Ecology, and Tax and fiscal efforts.

16th Finance Commission (16th FC)

• Chairman: Arvind Panagariya, former Vice-Chairman, NITI Aayog, is the Chairman of the 16th FC.
• Members: The Commission’s members include:
  • T. Rabi Sankar, Deputy Governor, RBI, as a part-time member. His appointment follows the resignation of Ajay Narayan Jha, a full-time member.
  • Annie George Mathew and Dr. Niranjan Rajadhyaksha as full-time members, and Dr. Soumya Kanti Ghosh as a part-time member.
• Tenure and Deadline: The 16th FC is mandated to submit its recommendations by 31st October, 2025. Its recommendations will cover the award period of five years commencing from 1st April, 2026.

Analysis of the Article: Decoding the 16th FC’s Opportunity for Climate Governance

The article presents a strong case for the 16th Finance Commission to integrate climate and environmental considerations into its recommendations, arguing that this would be a transformative step towards fostering climate-responsive governance in India.

1. The Need to Go Beyond Traditional Criteria:

• Growing Complaints of States: The 16th FC is expected to look into “the growing complaints of states against the Centre dipping into the tax cess and surcharge pools” (which are not shared with them).
• “Polycrisis” of Climate Change: The article argues that the adverse effects of climate change are assuming “polycrisis” proportions, necessitating a shift in policy across sectors towards a low-carbon regime.
• “Net Zero” as “Net Positive”: Policymakers must believe that ‘net zero’ is actually ‘net positive’, as India has shown with its high GDP growth trajectory while doing more on the climate front than most other countries.

2. Suggestions for Climate-Responsive Governance by the 16th FC:

• Create National and State Carbon Accounting Authorities:
  • The Problem: The “stocks and flows of carbon emissions are not tracked at a granular level anywhere in the world”. This prevents the implementation of a progressive carbon tax that penalizes large fossil fuel users.
  • Proposed Solution: The 16th FC may consider giving promotional sector-specific grants to the Centre and states to set up an ecosystem of carbon accounting at the household level and establish carbon accounting authorities.
  • Expected Outcome: This would make it mandatory for businesses and individuals to report emissions, track progress towards net-zero emissions by 2070, and align with India’s LiFe (Lifestyle for Environment) approach.
• Modify the Commission’s Forest Cover and Ecology Criterion:
  • The Problem: Forest cover is used as a criterion for tax devolution, but it is an indirect proxy for state climate efforts.
  • Proposed Solution: The 16th FC should adopt “climate and disaster proofing initiatives” as a new criterion. This new criterion would subsume the old one and provide separate grants for preparedness, mitigation, and adaptation efforts to create climate-resilient infrastructure.
  • Increase Weightage: The weightage for this criterion should be increased from 10% in the 15th FC to 20%.
• Grant States the Power to Levy a Green Tax:
  • The Problem: Mineral-bearing states like Odisha, Telangana, Karnataka, and Jharkhand face environmental degradation from mining.
  • Proposed Solution: These states should be allowed to levy a green tax to fund mitigation and adaptation measures.
• Stop Diversion of Clean Energy Cess:
  • The Problem: The Centre’s clean energy cess on coal production was used for GST compensation to states instead of for investments in clean energy technology and other adaptation measures.
  • Proposed Solution: This cess should be “disentangled from GST” and distributed to coal-producing states.

Conclusion: The 16th Finance Commission has a unique and “big opportunity” to foster climate-responsive governance. By adopting these progressive and innovative suggestions, the commission can help align India’s fiscal policy with its ambitious climate goals, ensuring that economic development is sustainable and resilient to future environmental shocks.

Purchasing Managers’ Index (PMI)

Context: Services PMI is at 60.5 in July. It was 60.4 in June. The index has now been above the neutral 50 mark, which separates contraction from expansion, for four years straight.

Link to the Article: Business Standard

India’s service sector has started the second quarter of the fiscal year on a strong note, with the HSBC India Services Purchasing Managers’ Index (PMI) for July hitting 60.5. This figure, up from 60.4 in June, indicates robust expansion in output and new orders, driven by buoyant domestic demand and a significant pick-up in international sales. This sustained momentum in services, along with a resilient manufacturing sector, reflects a positive start to the quarter, although it is tempered by concerns over inflation and a slowdown in employment growth.

Purchasing Managers’ Index (PMI):

The Purchasing Managers’ Index (PMI) is a key economic indicator that provides a snapshot of the health of an economy’s private sector.

• Purpose: The PMI’s main purpose is to gauge business sentiment and economic trends in the manufacturing and services sectors. A PMI reading offers a quick, high-frequency view of business conditions and is a leading indicator of economic activity. A figure above 50 denotes expansion in the sector, while a figure below 50 denotes contraction.
• Who Compiles and Publishes It: The HSBC India Services PMI is compiled by S&P Global. The index is a private survey based on data from a panel of companies in the respective sectors.
• Methodology: The PMI is based on a monthly survey sent to purchasing managers in a panel of companies. The survey questions cover five key areas:
  • New Orders
  • Output/Production
  • Employment
  • Suppliers’ Delivery Times
  • Stocks of Purchases The index is a weighted average of the diffusion indices for these five components. A diffusion index measures the direction of change in a particular indicator (e.g., more new orders, less new orders, no change).
• Implication on the Economy:
  • Expansionary PMI (above 50): Signals that the economy is growing. A higher reading indicates a faster rate of expansion. This can lead to increased hiring and capital investment.
  • Contractionary PMI (below 50): Signals that the economy is shrinking. A lower reading indicates a faster rate of contraction. This can lead to job cuts and reduced business activity.
  • Leading Indicator: Central banks, investors, and policymakers closely watch PMI data as it provides an early signal of economic turning points, often before official GDP data is released.

Categories of PMI

The PMI is compiled for different sectors of the economy to provide a detailed view of business activity.

• PMI – Manufacturing:
  • What: Measures the health of the manufacturing sector. It is based on a survey of purchasing managers in manufacturing companies.
  • India’s Status: India’s manufacturing PMI rose to a 16-month high of 59.1 in July, up from 58.4 in the previous month. This indicates resilience in the manufacturing sector despite “external headwinds”.
• PMI – Services:
  • What: Measures the health of the services sector, which is a major contributor to India’s GDP. It is based on a survey of purchasing managers in service-oriented companies.
  • India’s Status: The HSBC India services PMI stood at 60.5 in July, up from 60.4 in June. The index has been above the neutral 50 mark for four years straight. This reflects strong growth momentum in the services sector.

Analysis of the Article: Decoding India’s Services PMI Performance

The article provides a detailed analysis of India’s services PMI for July, highlighting the drivers of its strong performance and pointing out a few areas of concern.

1. Strong Growth Momentum and Key Drivers:

• Output and New Orders: Indian service providers’ output and new order intakes rose at the “fastest rates since August 2024” in July. This was driven by a “robust expansion in demand, international sales and output”.
• Buoyant Demand: The main aspect behind output growth was “sustained increases in new business intakes,” which were underpinned by “advertising, demand buoyancy and new client onboarding”.
• Pick-up in International Sales: Overseas demand “particularly improved from Asia, Canada, Europe, the UAE and the US”. The rate of expansion in external sales was “sharp and the second-fastest in a year”.

2. Sectoral and Business-Level Insights:

• Best Performing Sector: Finance & insurance was the “best performing sector in terms of both new orders and business activity”.
• Weakest Performing Sector: Real estate & business services registered the slowest increases.
• Factors Supporting Confidence: Business confidence was supported by “efficiency gains, marketing, tech innovation and a growing online presence”.
• Rising Costs: Services companies signalled “another increase in their expenses” at the start of the second quarter, with “greater food, freight and labour costs”.

3. Key Areas of Concern:

• Inflationary Pressure: While the rate of input and output inflation “quickened a tad faster than in June,” it remained “mild in the context of historical data”. However, this “could change going forward as indicated by the recent CPI and WPI prints”.
• Slowdown in Employment Growth: The most significant concern is that the July data pointed to the “weakest increase in services sector employment in 15 months”. The rate of job creation was only slight and “broadly converging to its long-run average”.

4. Services-Manufacturing Synergy:

• The resilience in the services sector “mirrors strength in the manufacturing sector,” which is also grappling with external headwinds.
• India’s manufacturing PMI also rose to a 16-month high of 59.1 in July, up from 58.4 in the previous month, despite “concerns are building over the potential impact of higher US tariffs”.

In conclusion, India’s services sector, as indicated by the July PMI, is experiencing a strong expansion driven by both domestic and international demand. This resilience is complemented by a robust manufacturing sector. However, the outlook is not without its caveats, as concerns regarding a slowdown in employment growth and potential inflationary pressures from rising costs loom. This performance provides a solid start to the second quarter but necessitates cautious monitoring of macroeconomic variables and global developments like US tariffs.

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