GS3 ECONOMICS:
Key Proposal
- The central government plans to lower states’ share of federal tax revenue from 41% to 40%, potentially increasing central funds by ₹35,000 crore ($4.03 billion).
- The Finance Commission will review the proposal, with binding recommendations expected by October 31, 2025.
Fiscal Impact & Revenue Constraints
- India’s fiscal deficit for 2024-25 is projected at 4.8% of GDP, while states face a 3.2% deficit.
- States account for over 60% of public spending, primarily on social infrastructure, whereas the Centre focuses on physical infrastructure.
- The introduction of GST (2017) has limited states’ independent revenue generation, increasing reliance on central allocations.
Conditional Grants & Policy Shift
- The Centre may impose conditions on grants, discouraging politically driven expenditures like cash handouts and debt waivers.
- Revenue-deficit grants have already declined from ₹1.18 trillion (2021-22) to ₹13,700 crore (2025-26).
Potential Consequences
- States may need to adjust their budgets to compensate for reduced central funding.
- The evolving fiscal structure could impact governance, public welfare programs, and federal-state financial relations.