On October 14, 2024, the Union Government of India announced the release of Rs 1,78,173 crore to states as part of tax devolution. This funding includes both a regular instalment and an advance instalment of Rs 89,086.50 crore, aimed at enhancing capital spending and welfare expenditures during the festive season. Uttar Pradesh received the largest allocation of Rs 31,962 crore, reflecting the government's strategy to bolster state economies during a critical time [b29066d2].
In a further effort to support state economies, the Centre plans to disburse Rs 90,000 crore of the Rs 1.5 lakh crore capex loans by December 2024. So far, Rs 70,000 crore has been sanctioned, with Rs 40,000 crore already disbursed. Additionally, Rs 25,000 crore is allocated as tied funds to incentivize states' capital expenditure performance in FY25. However, the disbursement has faced delays due to the upcoming general elections in the first quarter of FY25 [5942f024].
The tax devolution formula, established under Article 270 of the Indian Constitution, allocates net tax proceeds to states based on factors such as per capita income and population. States are entitled to 41% of the divisible pool, but critics argue that this system disproportionately favors states with higher population growth. In response, Finance Ministers from five opposition-ruled states have demanded an increase in the divisible pool to 50%, emphasizing the need for a more equitable distribution of resources [b29066d2].
In addition to these financial measures, the FY25 Budget introduces Employment-Linked Incentive Schemes (ELI) designed to enhance workforce efficiency across the country. Scheme A offers one month’s wage (up to Rs 15,000) to first-time employees, while Scheme B incentivizes employment in the manufacturing sector by covering EPFO contributions for the first four years. A manufacturing unit employing a youth at a gross salary of Rs 30,000 can benefit from Rs 21,600 in EPFO savings. Furthermore, employees can invest these savings into a skill-based growth compact, potentially receiving a 10% salary increment in FY26. This initiative highlights the importance of skill development for India's young workforce [fad5cdf6].
This announcement comes amidst a broader context of financial challenges faced by various states in India. The recent federal budget has been scrutinized for its limited fiscal space, which has made it difficult to provide adequate relief to heavily burdened taxpayers. The budget, presented by Finance Minister Muhammad Aurangzeb, aims to address deficits while navigating a politically charged environment [04a4e97a].
As India prepares for the recommendations of the Sixteenth Finance Commission, expected by October 2025, the implications of tax devolution and its impact on state economies will be closely monitored. The ongoing discussions around fiscal policies and resource allocation will play a crucial role in shaping the economic landscape for both India and its states in the coming years [b29066d2].