Union Budget’s internal fiscal & policy flow to States and Union Territories, focusing on how money and policy actually move inside India

 Union Budget’s internal fiscal & policy flow to States and Union Territories, focusing on how money and policy actually move inside India 

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I. Constitutional & Fiscal ARCHITECTURE

(How Union Budget reaches States & UTs)

1. Divisible Pool of Taxes (Core Federal Channel)

Union collects GST (CGST), Income Tax, Corporation Tax, Excise, Customs

A fixed share is transferred to states as per Finance Commission formula

Current framework (15th Finance Commission):

≈ 41% of net divisible pool → States

Distribution criteria include:

Population (1971 & 2011)

Area

Income distance (poorer states get more)

Forest & ecology

Tax effort

👉 This is unconditional money — states decide how to spend.

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2. Grants-in-Aid

Three major types:

1. Revenue Deficit Grants (for fiscally weaker states)

2. Sector-specific grants (health, judiciary, local bodies)

3. State-specific grants (NE states, hill states, UTs)

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II. Centrally Sponsored Schemes (CSS)

(Policy steering tool of the Union)

Cost-Sharing Pattern (typical):

General states: 60% Centre : 40% State

NE & Himalayan states: 90% : 10%

UTs without legislature: 100% Centre

UTs with legislature (Delhi, Puducherry): ~60:40

Major CSS impacting States & UTs:

Sector Key Schemes

Health NHM, Ayushman Bharat

Rural MGNREGA, PMGSY

Urban AMRUT, Swachh Bharat

Education Samagra Shiksha

Food NFSA, PMGKAY

Housing PMAY (Rural & Urban)

👉 Union Budget decides priorities; States execute.

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III. Capital Expenditure & State-Linked Growth

1. 50-Year Interest-Free Capex Loans to States

One of the most important recent structural tools

Purpose:

Roads

Urban infra

Power & water

Logistics & industrial parks

Linked to reforms:

Power sector efficiency

Urban planning

Asset monetisation

Digital governance

👉 This quietly reshapes state policy behaviour.

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2. Infrastructure Ministries → States

Railways (projects state-wise)

Highways (Bharatmala, Gati Shakti)

Jal Jeevan Mission

Power transmission corridors

States with better execution capacity receive repeat allocations.

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IV. Union Territories: DIFFERENT TREATMENT

A. UTs without legislature

(J&K, Ladakh, Andaman, Lakshadweep, Dadra & Nagar Haveli & Daman & Diu)

Direct central budgeting

No share from divisible pool

Entire administration funded via:

UT budget demand grants

Line ministries

👉 Function almost like central departments.

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B. UTs with legislature

(Delhi, Puducherry)

Receive:

Share of central taxes

CSS funding

But limited fiscal autonomy

Frequent Centre–UT coordination issues (especially Delhi)

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V. STATE-WISE IMPACT PATTERNS (Illustrative)

High Receivers (Revenue Support)

Bihar

Uttar Pradesh

Madhya Pradesh

Rajasthan

Odisha

Reason: Income distance + population

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Capex-Heavy States

Maharashtra

Gujarat

Tamil Nadu

Karnataka

Telangana

Reason: Execution capacity + industrial linkage

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Strategic & Border States

Arunachal Pradesh

Sikkim

Ladakh

J&K

Reason: Connectivity, defence, national security

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VI. POLICY SIGNALS STATES WATCH IN UNION BUDGET

States don’t only watch money — they watch signals:

🔹 Is capex rising or falling?

🔹 Are CSS being merged or expanded?

🔹 Are reforms incentivised or penalised?

🔹 Is GST compensation logic changing?

🔹 Is urban India or rural India prioritised?

👉 Union Budget = National policy compass for states

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VII. BIG PICTURE (Mind-Level View)

From a deeper governance lens (which you often emphasise):

Union Budget is not only finance

It is mind-coordination among states

Aligns:

Administrative thinking

Economic behaviour

Long-term national continuity

A strong Union Budget reduces policy chaos between states and keeps the federation mentally aligned.