Grant-In-Aid, Tax Devolution From Centre To States Likely To Slow Down To 4.5%: NSE

"The states have budgeted grants-in-aid from the Centre to drop by 6.3 per cent in FY25BE as against a growth of 13.9 per cent in FY24RE," the report said

In addition to the decline in grants, the growth in devolution—the transfer of taxes from the Centre to the states—is also anticipated to slow

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The state governments across India are anticipated to encounter tighter finances in FY25, with grants-in-aid from the Centre projected to decline by 6.3 per cent, according to a report by NSE. The report emphasises that this marks a stark contrast to the 13.9 per cent growth in these grants observed in FY24. This reduction, which significantly impacts the non-tax revenues of many states, could create financial strain, particularly for those heavily reliant on central support.

"The states have budgeted grants-in-aid from the Centre to drop by 6.3 per cent in FY25BE as against a growth of 13.9 per cent in FY24RE," the report said. 

The decrease in grant funding is especially troubling for states that depend heavily on this revenue source. States in the eastern and northeastern regions—such as Meghalaya, Mizoram, Himachal Pradesh, and Assam—are among the most impacted.

The report indicates that these states derive a substantial portion of their income from grants-in-aid, which account for between 25 per cent and 40 per cent of their total revenue receipts.

In FY25, these states are projected to experience a 26 per cent reduction in grants from the Centre, which could significantly affect their financial stability.

"This is particularly true for eastern and northeastern states (Meghalaya, Mizoram, Himachal Pradesh, Assam) who have about 25 per cent to 40 per cent of their revenue receipts coming from the grants-in-aid from the Centre," the report states.

In addition to the decline in grants, the growth in devolution—the transfer of taxes from the Centre to the states—is also anticipated to slow.

Devolution is expected to increase by only 11 per cent in FY25, down from 16.2 per cent in FY24. "Further, growth in devolution is also expected to moderate to 11 per cent in FY25BE from 16.2 per cent in the previous year (FY24RE), translating into a modest 4.5 per cent growth in overall transfers from the Centre (devolution+ grants-in-aid) vs 15.3 per cent in FY24RE," the report added.

Overall, total transfers from the Centre, encompassing devolution and grants-in-aid, are projected to grow by a modest 4.5 per cent, a significant decline from the 15.3 per cent increase seen in FY24. This slowdown in central transfers may complicate states' efforts to balance their budgets and fund essential projects.

During the pandemic in FY21, grants-in-aid from the Centre accounted for 77 per cent of non-tax revenues for many states. However, this share has been declining and is expected to drop to 61 per cent in FY25. For states reliant on these transfers, any grant reduction will likely compel them to cut spending or seek alternative revenue sources, a challenging endeavour.

This overall decline in central assistance and other financial pressures suggests that states may need to implement stricter financial management strategies to meet their expenditure needs while ensuring fiscal stability.