The recommendations of the Sixteenth Finance Commission (SFC) for the period 2026-31, accepted by the Indian Union government, have raised alarms about the future of fiscal federalism in India. While the SFC has retained states' share at 41%, their effective share has dropped from approximately 36% to 32%. This change is particularly detrimental to smaller states, especially in the northeastern region, which will see a 15.5% reduction in tax devolution compared to the previous commission. The SFC's decision to discontinue revenue deficit grants, which supported fiscally weaker states, has been criticized as undermining the constitutional framework that ensures equity. The SFC's approach, which favors discretionary funding for local bodies over statutory grants, poses three major issues: it shifts from criteria-based transfers to discretionary ones, reduces accountability, and prioritizes efficiency over equity. By treating local bodies as equal stakeholders in fiscal distribution, the SFC risks diluting the constitutional status of states, which are fundamental units of the Union of India. This shift towards decentralization should not come at the expense of federalism and the needs of states.