The Revenue Deficit Grant (RDG) to states will come down to zero in the current financial year, following the recommendations of the Finance Commission report that was tabled in Parliament along with the Union Budget today. The move marks a significant shift in Centre State fiscal relations and signals the end of a major support mechanism that several states, including Punjab and Himachal, have relied upon in recent years.In its report, the Commission observed that states must now focus on strengthening their own tax systems and rationalising expenditure, especially after the fiscal stress caused by the COVID-19 pandemic has eased. It noted that revenue deficit at the aggregate level of states is currently hovering around 0.3 per cent of GDP in the post-COVID period, indicating scope for correction through better fiscal management.The Commission underlined that recurrent revenue deficit grants across successive Finance Commissions had created a “time inconsistency” problem. States, anticipating compensation from the Centre for revenue shortfalls, were less inclined to undertake difficult fiscal reforms such as improving tax efficiency, rationalising subsidies and controlling revenue expenditure.According to the report, once states internalise expectations of central assistance, fiscal discipline weakens and dependency tends to deepen. It stressed that the pandemic is now behind the country and states must move toward self-sustaining fiscal frameworks.The Commission pointed out that the size of state budgets has shown annual variations of up to one percentage point of GDP between 2011-12 and 2023-24, reflecting flexibility in response to changing economic conditions. Even committed expenditure of states fell from 7.8 per cent of GDP in 2020-21 to 6.9 per cent in 2023-24, compared to 7.1 per cent in 2011-12. This, it said, indicates room for rationalising establishment and administrative expenses.In line with the diminishing trend recommended by the Fifteenth Finance Commission, which had reduced RDGs gradually to near-zero by 2025-26, the present report has categorically stated that no revenue deficit grants will be recommended to States going forward. It has also ruled out sector-specific or state-specific grants under this category.Impact on PunjabThe decision is expected to have significant implications for fiscally stressed states such as Punjab.Under the recommendations of the Fifteenth Finance Commission, Punjab was among the major recipients of revenue deficit grants. For the award period 2021-22 to 2025-26, Punjab was allocated revenue deficit grants amounting to approximately Rs 3,000 crore in 2021-22, which tapered to around Rs 2,000 crore in 2022-23, and further declined in subsequent years as part of the phased reduction plan.With the grants now set to touch zero this financial year, Punjab will no longer receive this assured fiscal support. Given that the state continues to face high committed expenditure on salaries, pensions and interest payments, the discontinuation of RDGs is likely to intensify pressure on its finances.The withdrawal of RDGs will compel the state to either enhance revenue mobilisation, cut expenditure, or increase borrowing within the limits prescribed under fiscal responsibility norms.The Commission’s recommendations reflect a broader policy direction aimed at promoting fiscal responsibility and reducing dependence on central transfers for revenue gaps. By ending revenue deficit grants, the Centre appears to be sending a clear message that States must strengthen tax administration, widen the tax base and improve expenditure management.As the new financial year begins, states like Punjab will now have to recalibrate their fiscal strategies in the absence of revenue deficit grants.