"Now I need to adjust the income to non taxable. Where can make an adjustment to other income from a 1099 misc?"

Is the grant for something specifically excluded for tax purposes per some law or regulation?

You don't change the form type, and the 1099-Misc or 1099-G is not what controls if that is taxable or not. That doesn't make this an error, either. You would need to understand the grant, what it was applied for (the qualifying need) and what it was meant to do.