A new fund-sharing mechanism under the proposed VB-G RAM G framework could significantly enhance fiscal transfers to states, with a projected gain of around Rs 17,000 crore, a research report by the State Bank of India has said. The gain is estimated when compared to the average allocation received by states over the past seven years.
The report is based on a simulated, normative assessment model applied to the Centre’s share of funding, aimed at introducing greater objectivity and transparency in the allocation process. According to SBI, such a framework would make most states net beneficiaries while addressing long-standing concerns over uneven and discretionary fund distribution.
Seven criteria anchored in equity and efficiency
The proposed allocation framework rests on two foundational pillars, equity and efficiency. The SBI report identifies seven criteria, distributed across these twin principles, to assess how funds should be shared among states.
Equity-focused parameters are designed to ensure that states with higher structural challenges receive adequate fiscal support. These include factors such as dependence on rural labour markets, administrative spread, and the inherent need for public employment support. The objective is to provide sufficient fiscal space to states facing higher employment demand and socio-economic vulnerabilities.
The efficiency pillar, on the other hand, seeks to reward states that demonstrate effective utilisation of funds. This includes the ability to convert allocations into sustained employment generation, timely wage payments, and the creation of durable assets under employment schemes.
States net gainers under hypothetical model
Using a simulated scenario where only the Centre’s share is subjected to normative assessment, the report compares the outcome with actual allocations under MGNREGA between FY19 and FY25, excluding the pandemic-affected FY21.
“We estimate that states gain around Rs 17,000 crore when compared to the average allocation of the last seven years, indicating a scenario where most states would be net gainers based on the hypothetical weights and inter-se distribution,” said Soumya Kanti Ghosh, Group Chief Economic Advisor at SBI.
The analysis suggests that all states emerge as gainers under the proposed framework, barring two that experience only marginal losses. Even in these cases, the report notes that the impact is minimal and largely influenced by outlier allocation years.
The SBI report specifically cites Tamil Nadu to illustrate how exceptional allocation spikes can distort comparative outcomes. In FY24, Tamil Nadu witnessed a 29 percent increase in allocation compared to the average of FY22 and FY23.
If FY24 is excluded as an outlier, the projected loss for the state under the normative framework becomes negligible, the report said. This, according to SBI, strengthens the case for using multi-year averages and objective criteria rather than year-specific allocations influenced by short-term considerations.
Top Gainers: Uttar Pradesh and Maharashtra
Among the states, Uttar Pradesh and Maharashtra emerge as the biggest beneficiaries under the simulated VB-G RAM G framework. They are followed by Bihar, Chhattisgarh, and Gujarat, reflecting both scale and effective utilisation parameters built into the model.
The report notes that the distribution pattern supports both developed and less-developed states, countering the perception that objective criteria would disproportionately favour one category over the other.
A key takeaway from the SBI analysis is that objective, criteria-based allocation does not dilute the equity principle. Instead, it strengthens fiscal devolution by ensuring that need-based support is complemented by performance incentives.
The report argues that such a balanced approach would improve outcomes under employment guarantee schemes by encouraging states to focus not only on higher fund absorption but also on quality implementation, asset durability, and timely wage disbursement.
In addition to central transfers, the report highlights the importance of the states’ 40 percent contribution in enhancing outcomes. States that effectively mobilise their share and align implementation with efficiency benchmarks stand to maximise the benefits of the proposed framework.
SBI maintained that greater fiscal discipline, combined with transparent allocation norms, could improve trust between the Centre and states while reducing friction over fund releases.
The SBI report concludes that adopting a normative, objective framework such as VB-G RAM G could make fiscal devolution more predictable, equitable, and outcome-oriented. By moving away from ad hoc or historically skewed allocations, the proposed model has the potential to strengthen cooperative federalism while improving the effectiveness of rural employment spending.
