Revenue deficit grants

Also called: Post-devolution revenue deficit grants · Topic: Fiscal Federalism: Finance Commission, Devolution and Centre-State Finances · NCERT: Beyond NCERT

Meaning

A revenue deficit grant is a grant the Finance Commission (FC) recommends for a state whose revenue expenditure is still higher than its revenue receipts, even after the state gets its share of central taxes. The grant fills that remaining gap.

Formula: Revenue deficit grant = State revenue expenditure − (Own revenue + Tax devolution), paid only when the result is positive.

It matters because it was the main "gap-filling" tool of the 15th FC (2021-26). The 16th FC (2026-31) has discontinued it [1]. This makes it a live Prelims fact and a Mains debate about moral hazard versus equalisation.

Explanation

How it works: "post-devolution" gap-filling

• Step 1: Tax devolution comes first.
• Tax devolution is the states' share of central taxes under Art. 270. States get it as a right and can spend it as they choose.

• The FC first decides how much each state gets from the divisible pool (central taxes minus cesses and surcharges).

• Step 2: The FC checks the gap left over.

• Revenue expenditure means day-to-day spending such as salaries, pensions, interest and subsidies.
• Revenue receipts here means the state's own revenue plus its devolution share.

• If spending is still higher than these receipts, the state has a post-devolution revenue deficit.

• Step 3: The grant covers that gap.

• The grant goes through the statutory route of Art. 275(1). This route is for states "in need of assistance", and it follows FC advice under Art. 280.
• These grants are charged on the Consolidated Fund of India (CFI), the Union's main account. Parliament can discuss them but does not vote on them, so the government of the day cannot hold them back through the budget vote.

Worked example

• State A spends ₹100. It collects ₹55 on its own and gets ₹30 from devolution.

• Gap = 100 − (55 + 30) = ₹15. The FC gives a revenue deficit grant of ₹15.

• State B spends ₹100. It collects ₹70 on its own and gets ₹35 from devolution.

• Gap = 100 − (70 + 35) = −₹5. The gap is below zero, so State B gets nothing.

• Lesson: the grant depends on the size of the gap, not on how poor the state is or how hard it tries to raise revenue.

Nature of the grant

• Untied in use: it fills a general budget gap. It is not linked to one scheme or sector.
• Tapering: under the 15th FC the grant grew smaller each year. States were expected to close their deficits over time.
• Paid in instalments: in 2021-22 it was released in monthly instalments [3].

What makes it rise or fall

• It rises when:
• committed spending (salaries, pensions, interest on old debt) is high;
• own tax base is weak, for example in hill and north-eastern states;

• the devolution share is small.

• It falls when:

• the state raises more of its own revenue;
• the state cuts wasteful revenue spending;

• devolution grows faster than spending.

• Built-in problem: a state that overspends shows a bigger gap and so gets a bigger grant. This is moral hazard: a party takes more risk because someone else bears the cost.

In India

• Institution: the Finance Commission (Art. 280) assesses each state's post-devolution gap and recommends the grant. Parliament provides the money under Art. 275(1).
• 15th FC (2021-26):
• ₹2,94,514 crore to 17 states to remove their revenue deficits [2] (NCERT: about ₹2.94 lakh crore).
• 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, West Bengal [3].

• Total FC grants over 2021-26 were ₹10,33,062 crore [2].

• 16th FC (2026-31): discontinued.

• Revenue deficit grants, sector-specific grants and state-specific grants were all dropped [1].
• Stated reason: such grants "create adverse incentive". They push states to "be profligate" (overspend) instead of fixing the root causes of their deficits [4].
• Total grants are now ₹9.47 lakh crore, mostly for local bodies and disaster management [1].
• Vertical devolution stays at 41%, the same as under the 15th FC [1].

• Accompanying rules: the state fiscal deficit limit is 3% of GSDP (Gross State Domestic Product, the total output of a state). Off-budget borrowing must stop and be brought onto state budgets [4].

• Case: Himachal Pradesh

• It received ₹3,257 crore (1.3% of GSDP) in revenue deficit grants in 2025-26. All of this is lost in 2026-27.
• Total central grants to the state are estimated to fall by 48% in 2026-27 compared with 2025-26 revised estimates [4].

Don't confuse with

• Tax devolution (Art. 270): a share of central taxes that states get as a right, fixed by the FC's percentage (41%). A revenue deficit grant is a separate transfer that comes after devolution and covers only the gap left over.
• Revenue deficit / Effective revenue deficit (Union Budget): these measure the Union's own gap. Effective revenue deficit = Revenue deficit − Grants for creation of capital assets. A revenue deficit grant is a transfer to a state based on that state's gap.
• Art. 282 discretionary grants (CSS): the Centre gives these for "any public purpose" without FC advice. They are tied to schemes and usually need a matching state share. Revenue deficit grants are statutory (Art. 275(1)) and follow FC advice.
• Local body and disaster grants: these are also Art. 275 FC grants, but they are tied or performance-linked and continue under the 16th FC. Revenue deficit grants are gap-filling and have been dropped.

Prelims Hooks

• Revenue deficit grants are statutory grants under Art. 275(1), given on FC advice (Art. 280) and charged on the CFI (not voted).
• They are calculated after tax devolution: grant = revenue expenditure − (own revenue + devolution), paid only if the result is positive.
• 15th FC (2021-26): ₹2,94,514 crore to 17 states, tapering each year [2]. The 2021-22 amount was ₹1,18,452 crore, paid monthly [3].
• 16th FC (2026-31): revenue deficit, sector-specific and state-specific grants were all discontinued [1].
• Trap: vertical devolution is 41% under both the 15th and 16th FCs [1]. What changed in 2026-31 is the grant structure, not the tax share.
• Trap: these are not Art. 282 grants. Art. 282 grants need no FC advice and are the basis of centrally sponsored schemes.

Mains Points

• Moral hazard vs equalisation:
• Gap-filling rewards states with large deficits and weakens their reason to raise revenue or cut waste. The 16th FC says such grants "create adverse incentive" [4].
• But states with little capacity to raise their own revenue get hit hard. Himachal Pradesh loses 1.3% of GSDP and faces a 48% fall in central grants in 2026-27 [4].

• Middle path: a phased glide path, where grants taper but are tied to a plan for fiscal correction.

• Formula vs discretion:

• As FC grants (Art. 275) shrink, more transfers may move to Art. 282 CSS grants. These are tied, decided by the Centre and need matching shares.

• This can weaken cooperative federalism and state autonomy, especially for the NE and hill states that relied on these grants.

• Fiscal discipline package:

• Ending the grants comes with a 3% of GSDP fiscal deficit limit and an end to off-budget borrowing [4].
• Together these push states to fix structural deficits (high salary, pension and interest bills) rather than depend on central gap-filling.

Related concepts

• Grants-in-aid
• Tied and untied grants

Read more

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