The grants, meant to cover post-devolution revenue shortfalls, fell from ₹1,18,452 crore in 2021-22 to ₹24,483 crore in 2024-25, with a further drop to ₹13,705 crore expected in 2025-26, budget documents show.

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The steady decline reflects a broader fiscal strategy aimed at reducing states' reliance on central transfers and promoting financial self-sufficiency. The post-devolution revenue deficit grant, provided under Article 275 of the Constitution, helps states bridge gaps in their revenue accounts after tax devolution. However, the 15th Finance Commission's framework envisions a phased reduction, pushing states to align their revenue and expenditure.

This shift has led to a broader decline in overall transfers under the 15th Finance Commission's recommendations, which have fallen from ₹2,15,000 crore in 2021-22 to ₹1,03,000 crore in 2024-25, according to data from the finance ministry. The allocation was ₹1,74,000 crore in 2022-23 and ₹1,49,000 crore in 2023-24.

"The Finance Commission determines post-devolution revenue deficit grants based on the states' anticipated revenue and unavoidable expenditure," said a person aware of the matter, who didn't want to be named.

"The grants are provided on a pro-rata basis over six years, with a declining trend designed to eventually bring the states' revenue and expenditure to a net-zero balance by the end of the period," the person added.

A spokesperson of the ministry of finance didn't respond to emailed queries.

To be sure, the Centre's total transfer of funds to states and union territories increased from ₹8,07,000 crore in 2021-22 to ₹9,89,000 crore in 2024-25 and is estimated at ₹11,37,000 crore in 2025-26, according to the budget estimates.

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This includes Finance Commission grants, funds for centrally sponsored and central sector schemes, capital transfers, assistance for disaster relief, GST compensation loans, externally aided projects, and tribal welfare. It also covers special loans for state capital expenditure and transfers to union territories.

According to the latest Reserve Bank of India (RBI) data, the fiscal performance of states, especially on the revenue deficit front, has been improving in the last five years, with the revenue deficit of states rising during the pandemic and falling subsequently.

According to RBI data, states' revenue deficit, which was ₹20,000 crore (0.1% of GDP) in 2018-19, rose to ₹1,20,000 crore in 2019-20, peaking at ₹3,70,000 crore in 2020-21 during the pandemic, and then declining to ₹1,00,000 crore in 2021-22, ₹60,000 crore in 2022-23, and ₹70,000 crore in 2023-24 (provisional figures), and is estimated to rise to ₹80,000 crore (0.2% of GDP) in 2024-25 (BE).

"State governments are undertaking various initiatives to boost revenue collection, streamline compliance, and enhance transparency," RBI said in its latest report on state finances released in December 2024.

The report added that states' tax revenue buoyancy rose to 1.44 in the post-pandemic period, up from the pre-pandemic average of 0.86 (2012-13 to 2019-20).

State tax revenue and fiscal deficit trends

A recent report from CareEdge says that the overall receipts of the top 20 states grew 7.2% annually, while revenue receipt grew at 6.3% yearly during the H1, FY25 period.

"Overall, state tax revenue collections remained healthy, growing at 11.1% (Y-o-Y) in H1 FY25," it added.

According to the report, the aggregate fiscal deficit for the top 20 states stood at 2.9% of the projected GSDP in the first half of FY25, slightly higher than the 2.7% recorded in H1 FY24, against the 15th Finance Commission recommendation of maintaining a fiscal deficit limit of 3% of the GSDP.

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