Grants-in-aid

Also called: Article 275 grants · Topic: Fiscal Federalism: Finance Commission, Devolution and Centre-State Finances · NCERT: Beyond NCERT

Meaning

Grants-in-aid are money transfers from the Centre to the states on top of tax devolution (the states' share of central taxes under Art. 270, which they get as a right). A grant comes by one of two routes:

• Statutory grants under Art. 275(1), given on the advice of the Finance Commission (FC) and charged on the Consolidated Fund of India (CFI).
• Discretionary grants under Art. 282, given by the Centre for any public purpose.

Why it matters: tax devolution is general money that states can spend freely. Grants let the system target specific needs, such as local bodies, disaster relief, Scheduled Tribes or states with a revenue gap. They also let the Centre attach conditions. Two formulas matter here:

• Revenue deficit grant = State revenue expenditure − (Own revenue + Tax devolution), only when the result is positive
• Effective revenue deficit = Revenue deficit − Grants for creation of capital assets

Explanation

The three constitutional routes

• Art. 275(1): statutory grants
• "Statutory" means the grant comes from the Constitution and the law. It does not depend on the Centre's choice in a given year.
• Charged on the CFI. The CFI is the Union's main account, where all its revenue and borrowing go.
  • Parliament can discuss these grants but does not vote on them.
  • So the government of the day cannot hold them back through the budget vote.
• Who gets them: states "in need of assistance". Parliament fixes the amount by law, on FC advice.
• Provisos (special conditions in the Article):
  • grants for the welfare of Scheduled Tribes;
  • grants to raise the administration of Scheduled Areas to the level of the rest of the state.

• Link to Art. 280: the FC recommends the principles for grants out of the CFI. Revenue deficit grants, local-body grants and disaster grants all follow this FC route.

• Art. 282: discretionary grants

• The Union (or a state) can give grants for any public purpose. This holds even when the subject is outside its own law-making list.
• No FC advice is needed. The Centre decides through its ministries.

• This Article is the constitutional basis of centrally sponsored schemes (CSS). A CSS is a scheme the Centre designs and part-funds. The state carries it out, often with a matching state share.

• Art. 273: jute export duty grants

• These went to jute-producing states in place of their share of jute export duty.
• They were temporary and are now only of historical interest.

Tied and untied grants

• Tied grant: the state must spend it on a named purpose, or only after meeting set conditions.

• Examples: local-body grants for water and sanitation, health grants, disaster funds.

• Untied grant: the state or local body decides how to spend it.

• 16th FC example (2026-31): one grant, half tied and half untied. Basic grants to local bodies are 50% untied. The other 50% is tied to sanitation and solid waste management, or to water management [1].
• Entry conditions (16th FC, 2026-31). A state's local bodies get no grant unless the state has:
• formed its local bodies as the Constitution requires;
• published their provisional and audited accounts;

• set up its State Finance Commission (SFC) on time [1].

• Earlier conditions (15th FC): the state had to publish accounts, set a minimum floor rate for property tax, and set up SFCs by March 2024 [2].

Revenue deficit grants: how gap-filling works

• Meaning: a grant to a state whose revenue expenditure is still more than its revenue receipts even after tax devolution. The grant fills the gap that remains.
• Worked example:
• A state spends ₹100. It collects ₹55 from its own taxes and gets ₹30 from devolution.
• Gap = 100 − (55 + 30) = ₹15. The FC gives a revenue deficit grant of ₹15.

• A state whose gap is zero or less gets nothing.

• What makes the grant rise or fall:

• A state gets more when its spending goes up or its own revenue stays low.
• It gets less when its own revenue or its devolution share grows.
• This is the root of the moral hazard debate (see Mains Points).

How grants appear in the Union Budget (Class 12)

• All grants to states count as Union revenue expenditure, even when they build roads or schools.
• Revenue expenditure is spending that creates no asset for the Union and does not reduce its liabilities.

• The asset belongs to the state, not the Union, so the Union books the spending as revenue expenditure.

• This is why the Union Budget shows "grants for creation of capital assets" as a separate item.

• Worked example:
• Union revenue expenditure = ₹40 lakh crore; revenue receipts = ₹35 lakh crore.
• Revenue deficit = 40 − 35 = ₹5 lakh crore.
• Of the grants to states, ₹3 lakh crore go to building assets.
• Effective revenue deficit = 5 − 3 = ₹2 lakh crore. This is the part of the deficit that went to pure consumption.

In India

• Institutions:
• The Finance Commission (Art. 280) recommends statutory grants under Art. 275.
• Union ministries decide Art. 282 grants through CSS.

• State Finance Commissions are a condition for getting local-body grants.

• 15th FC (2021-26):

• Total FC grants: ₹10,33,062 crore over five years [2].
• Revenue deficit grants: ₹2,94,514 crore to 17 states [2].
  • The grant tapered (grew smaller) each year.
  • 2021-22 alone: ₹1,18,452 crore, paid in monthly instalments [3].
  • The 17 states: Andhra Pradesh, Assam, Haryana, Himachal Pradesh, Karnataka, Kerala, Manipur, Meghalaya, Mizoram, Nagaland, Punjab, Rajasthan, Sikkim, Tamil Nadu, Tripura, Uttarakhand and West Bengal [3].
• Sector-specific grants: ₹1,29,987 crore across 8 sectors, for example agricultural reforms ₹45,000 crore, health ₹31,755 crore, PMGSY roads ₹27,539 crore and judiciary ₹10,425 crore [2].
• State-specific grants: ₹49,599 crore [2].
• Local bodies: ₹4,36,361 crore, including health grants of ₹70,051 crore [2].

• On CSS: the 15th FC asked for a minimum scheme size, with smaller schemes to be phased out. It also asked for third-party evaluation of schemes within fixed time limits [2].

• 16th FC (2026-31): a narrower grant system

• Total grants: ₹9.47 lakh crore [1].
• Vertical devolution (the states' share of the divisible pool, meaning central taxes minus cesses and surcharges) stays at 41%, the same as under the 15th FC [1].
• Discontinued: revenue deficit grants, sector-specific grants and state-specific grants [1].
  • Stated reason: such grants "create adverse incentive". They push states to "be profligate" (overspend) instead of fixing the causes of their deficits [4].
• Local bodies: ₹7.91 lakh crore [1]:
  • Rural: ₹4.35 lakh crore, made up of a basic grant of ₹3.48 lakh crore (80%) and a performance grant of ₹87,048 crore (20%).
  • Urban: ₹3.56 lakh crore, made up of:
  • a basic grant of ₹2.32 lakh crore;
  • a performance grant of ₹58,032 crore;
  • a Special Infrastructure Component of ₹56,100 crore, for wastewater systems in cities with 10-40 lakh people;
  • an Urbanisation Premium of ₹10,000 crore. This is one-time money for villages that merge into towns and for a policy on moving from rural to urban status.
• Disaster management: ₹1,55,916 crore. This is the Centre's share of a ₹2,04,401 crore corpus (total fund) for SDRF/SDMF (State Disaster Response Fund and State Disaster Mitigation Fund) [1].
  • Cost sharing (Centre:State): 90:10 in north-eastern and Himalayan states; 75:25 in all other states [1].
  • The 15th FC corpus was about ₹1,60,000 crore, with a Centre share of ₹1,20,000 crore. It used the same sharing pattern [2].

• Rules that go with the grants:

  • The fiscal deficit limit for states is 3% of GSDP (Gross State Domestic Product, the total output of a state).
  • Off-budget borrowing (loans taken through state-owned bodies so that they do not appear in the budget) must stop and be brought onto state budgets [4].

• Budget 2026-27: the Government provided ₹1.4 lakh crore of FC grants.

Don't confuse with

• Tax devolution (Art. 270): this is the states' share of the divisible pool (41% under both the 15th and 16th FCs). States get it as a right and can spend it freely. Grants-in-aid are a separate transfer on top of it, and they are often tied.
• Art. 275 vs Art. 282 grants: Art. 275(1) grants need FC advice, are charged on the CFI and are not voted. Art. 282 grants need no FC advice and can be for "any public purpose". CSS rest on Art. 282.
• Revenue deficit vs effective revenue deficit: the revenue deficit counts all grants to states as consumption. The effective revenue deficit subtracts grants for creation of capital assets.
• Finance Commission vs State Finance Commission: the FC advises on Centre-to-state transfers. The SFC advises on state-to-local-body transfers. Setting up an SFC on time is a condition for getting FC local-body grants.

Prelims Hooks

• Art. 275(1) grants go to states "in need of assistance", on FC advice. They are charged on the CFI and are not voted. The provisos cover Scheduled Tribe welfare and Scheduled Area administration.
• Art. 282 grants can be for "any public purpose", even outside the Union's law-making list. They need no FC advice and are the basis of centrally sponsored schemes.
• All grants to states are Union revenue expenditure. Effective revenue deficit = Revenue deficit − Grants for creation of capital assets.
• 15th FC (2021-26): revenue deficit grants of ₹2,94,514 crore went to 17 states. Total FC grants were ₹10,33,062 crore [2].
• 16th FC (2026-31): total grants are ₹9.47 lakh crore (local bodies ₹7.91 lakh crore + disaster about ₹1.56 lakh crore). Revenue deficit, sector-specific and state-specific grants were discontinued. Basic grants to local bodies are 50% untied, 50% tied [1].
• Trap: vertical devolution is 41% under both the 15th and 16th FCs. What changed in 2026-31 is the grant structure, not the tax share. SDRF/SDMF sharing is 90:10 for NE and Himalayan states and 75:25 for the rest.

Mains Points

• Moral hazard vs equalisation (GS-II/III):
• Moral hazard means a party takes more risk because someone else bears the cost. Gap-filling grants do this: a state that overspends gets a bigger grant, so it has less reason to raise its own revenue.
• The 16th FC says such grants "create adverse incentive" [4].
• But stopping them suddenly hurts states that cannot raise much revenue on their own:
  • Himachal Pradesh received ₹3,257 crore (1.3% of GSDP) in revenue deficit grants in 2025-26, and all of it is lost in 2026-27.
  • Its total central grants are estimated to fall by 48% in 2026-27 compared with the 2025-26 revised estimates [4].

• A middle path: taper the grants over time, and link them to a plan for fixing the state's finances.

• Formula vs discretion in cooperative federalism:

• As FC grants under Art. 275 shrink, more transfers can shift to Art. 282 CSS. These are tied, chosen by the Centre, and need a matching state share, which weakens state autonomy.
• Scheme size thresholds and third-party evaluation, as the 15th FC suggested, can limit this [2].

• The balance is hard: tied and performance grants reward reform, while untied grants respect state choice. The 16th FC's 50:50 basic grant tries to balance the two.

• Strengthening the third tier and honest accounting:

• About 84% of 16th FC grants (₹7.91 of ₹9.47 lakh crore) go to local bodies, with conditions on SFCs and audited accounts. This supports the 73rd and 74th Amendments. But when a state fails the conditions, its citizens lose the money.
• Asset-creating grants are booked as Union revenue expenditure, so the revenue deficit overstates how much the Union spends on consumption. The effective revenue deficit is a more accurate measure for FRBM (Fiscal Responsibility and Budget Management) targets.

Related concepts

• Revenue deficit grants
• Tied and untied grants

Read more

• Grants-in-aid: statutory, discretionary, tied and untied