In recent news, the Ministry of Finance has dispersed a monthly installment of a revenue deficit grant, amounting to Rs.7,183 crore, to 14 Indian states. This is part of the Post Devolution Revenue Deficit (PDRD) Grant that is provided by the Centre under Article 275 of the Indian Constitution.
Understanding the Post Devolution Revenue Deficit (PDRD)
Article 275 of the Indian Constitution enables the allocation of sums as Parliament may prescribe as grants-in-aid to states that require assistance. These grants, which are paid annually from the Consolidated Fund of India, can differ in amounts for different states. The nature of these grants can be capital and recurring sums.
The main objective of these grants is to enable states to meet the expenditure of state-level welfare schemes or improve the administration of scheduled areas. Furthermore, they help in correcting Inter-State disparities in financial resources and coordinate the maintenance and expansion of the welfare schemes of the State Governments at a uniform national level.
Recommendations for Grants
The disbursement of the grants follows the recommendations of the Finance Commission. They are released in monthly installments to bridge the gap in Revenue Accounts of the States post-devolution (of the divisible tax pool of the Centre). The 15th Finance Commission has suggested PDRD grants amounting to about Rs.3 trillion over five years ending FY26. The decision on the eligibility of States to receive this grant, and its quantum, is determined by the Commission based on the disparity between the assessment of revenue and expenditure of the State.
Center State Financial Relations as per the Constitution
The Indian Constitution contains elaborate guidelines related to the distribution of tax and non-tax revenues, borrowing power, and provisions for grants-in-aid by the Union to the States. Articles 268 to 293 in Part XII detail these financial relations between the Centre and States.
Taxing Powers
The Constitution divides taxing powers between the Centre and the states. The power to levy taxes on subjects listed in the Union List lies with Parliament, whereas state legislature can levy taxes on subjects listed in the State List. Both can levy taxes on subjects listed in Concurrent List.
Distribution of the Tax Revenue
The distribution of tax revenue is explained in various Articles from 268 to 270. Article 268 includes duties levied by the union but collected and appropriated by the states, such as stamp duties on bills of exchange, cheques, etc. Article 269 includes taxes levied and collected by the Union but assigned to the States, like taxes on the sale and purchase of goods in interstate trade.
Grants-in-Aid
Apart from shared taxes, the Constitution also provides for Grants-in-aid to the States from Central resources. These grants are of two types. Statutory Grants (Article 275) are given by Parliament from the Consolidated Fund of India to states needing assistance. Discretionary Grants (Article 282) empower both the Centre and the states to make grants for any public purpose, even if it falls outside their legislative competency.