State Governments in India Face Financial Challenges as Central Grants Decline
State governments across India are expected to face financial challenges in the fiscal year 2025 due to a projected 6.3% decline in grants-in-aid from the central government, according to a report by NSE. This marks a significant shift from the 13.9% growth in grants observed in FY24. These grants are a crucial part of non-tax revenues for many states, and the reduction could place financial pressure on those heavily reliant on central support.
Impact on Eastern and Northeastern States
States in the eastern and northeastern regions, such as Meghalaya, Mizoram, Himachal Pradesh, and Assam, are expected to be the most affected. These states receive a significant portion of their revenue from grants-in-aid, with such grants constituting between 25% and 40% of their total revenue receipts. In FY25, these states are anticipated to experience a 26% decline in grants from the Centre, which could severely impact their financial health.
Slowing Growth in Devolution
Alongside the drop in grants, the growth in devolution, which refers to the transfer of taxes from the Centre to the states, is also expected to slow. Devolution is set to rise by just 11% in FY25, down from 16.2% in FY24. Overall, the combined transfers from the Centre, including both devolution and grants-in-aid, are expected to grow by a modest 4.5%, a sharp drop from the 15.3% increase witnessed in FY24.
Financial Management Strategies
This slowdown in central transfers could make it harder for states to balance their budgets and fund key projects. During the pandemic in FY21, the share of grants-in-aid from the Centre in overall non-tax revenues for many states surged to 77%. However, this has been declining since then and is expected to fall to 61% in FY25. For states that depend on these transfers, any contraction in grants will force them to either cut spending or find alternative revenue sources, which could be a difficult task. States may need to adopt more stringent financial management strategies to ensure they can meet their expenditure needs while maintaining fiscal stability.
Doubts Revealed
Central Grants -: Central grants are funds given by the central government of India to state governments to help them with their expenses and development projects. These grants are important for states, especially those with less revenue of their own.
FY25 -: FY25 stands for the financial year 2025. In India, a financial year starts on April 1st and ends on March 31st of the next year. So, FY25 would be from April 1, 2024, to March 31, 2025.
Devolution -: Devolution refers to the transfer of powers and funds from the central government to state governments. In this context, it means the sharing of tax revenue collected by the central government with the states.
Fiscal Stability -: Fiscal stability means having a balanced budget where the government does not spend more money than it earns. It is important for maintaining economic health and avoiding debt.
Eastern and Northeastern States -: Eastern and northeastern states in India include regions like Meghalaya, Mizoram, Himachal Pradesh, and Assam. These areas often rely more on central grants due to less local revenue generation.
