State governments in India are likely to face tighter finances in the fiscal year 2025, as grants-in-aid from the Centre are projected to decrease by 6.3 percent, according to a report by NSE.
This reduction in grants is a significant change from the 13.9 percent growth seen in the previous fiscal year. Grants-in-aid are an important source of non-tax revenue for many states, so a decrease in these grants could put financial pressure on states that heavily rely on central support.
The states have budgeted for a 6.3 percent decrease in grants-in-aid from the Centre in the fiscal year 2025, as opposed to the 13.9 percent growth in the previous year, as stated in the report. This decrease in grants is particularly concerning for states that depend heavily on this source of income, such as Meghalaya, Mizoram, Himachal Pradesh, and Assam.
In the upcoming fiscal year, these states are expected to see a 26 percent decline in grants from the Centre, which could severely impact their financial well-being. Additionally, the growth in devolution, which involves the transfer of taxes from the Centre to the states, is expected to slow down.
Devolution is projected to rise by only 11 percent in the fiscal year 2025, down from 16.2 percent in the previous year. Overall, the combined transfers from the Centre, including both devolution and grants-in-aid, are expected to grow by a modest 4.5 percent, a significant drop from the 15.3 percent increase seen in the previous year.
The decline in central transfers could make it challenging for states to balance their budgets and fund important projects. With the share of grants-in-aid from the Centre in overall non-tax revenues expected to decrease to 61 percent in the fiscal year 2025, states that rely on these transfers may need to cut spending or find alternative revenue sources.
Overall, the reduction in central assistance, along with other financial pressures, may require states to implement stricter financial management strategies to ensure they can meet their expenditure needs while maintaining fiscal stability.
