Grants-in-Aid To Decline, but States To Spend More on Capex in FY27

 Chennai: Grants-in-aid to state governments have been declining in FY25 and FY26 and are expected to further decline in FY27. However, capital expenditure is expected to grow 16.4 per cent in FY27, which would be supported by the SASCI scheme and states’ own revenues.

Grants-in-aid to the states declined 15.8 per cent in FY25, and the decline continued in FY26 at 18 per cent, based on the assessment of provisional data for 24 states for April-December FY26.

The decline in grants would continue in FY27 as the 16th Finance Commission has recommended discontinuation of post-devolution revenue deficit grants (RDGs) to states. The 15the Finance Commission had recommended a gradual tapering of RDGs over FY22-FY26, beginning with 17 qualifying states in FY22 and reducing to six states in FY26. Based on 15FC recommendation, Himachal Pradesh, Manipur, Mizoram, Nagaland, Tripura, and Uttarakhand, combined, qualify for RDGs of Rs 13,705 crore in FY26. The discontinuation of RDGs effective FY27 would require these states to fund post-devolution revenue deficits from their own revenue.

However, India Ratings estimates capex to grow 16.4 per cent in FY27 and the capex/GDP ratio to improve to 2.9 per cent in FY27, against 2.7 per cent in FY26.

“The strong focus on capital expenditure is underpinned by the Rs 1.85 lakh crore allocation under the Special Assistance to States for Capital Investment (SASCI) scheme in the FY27…The continued focus on capital expenditure will bolster medium term growth and support fiscal stability”, said Anuradha Basumatari, Director, Public Finance, Ind-Ra.

Further, Ind-Ra expects aggregate revenue receipts to grow 9 per cent in FY27 against 6.8 per cent in FY26, supported by States’ Own Tax Revenue (SOTR) performance and tax devolution.

The states’ share in the net proceeds of union government taxes remains unchanged at 41 per cent. The Centre has allocated Rs 15.3 lakh crore as states’ share in central taxes in its FY27 budget, up 9.6 per cent over the allocation in FY26.

SOTR performance relies heavily on the collection of state goods and services tax (GST). The GST rationalisation announced in mid-FY26 may provide an upside to SOTR collection in FY27 on the back of a likely pick-up in consumption and economic activity. Ind-Ra estimates 10 per cent SOTR growth in FY27 compared with 8.7 per cent in FY26.