Fiscal Constraints on Government Spending
Governments in India, both at the central and state levels, are experiencing fiscal constraints due to several recent policy changes. These changes include alterations in corporate tax rates, personal income tax slabs, and Goods and Services Tax (GST) slabs.
Impact of Tax Cuts
- The corporate tax cuts in 2019 led to an estimated revenue loss of Rs 1.45 lakh crore.
- Adjustments in personal income tax slabs in the Union budget 2025-26 resulted in an estimated revenue loss of Rs 1 lakh crore.
- GST rationalisation impacts are still unfolding but are expected to affect tax collections over time.
Tax Revenue Trends
- Centre’s net tax revenues have shown minimal growth, from 7.2% of GDP in 2014-15 to a budgeted 7.9% in 2025-26.
- States' revenues have slightly increased, but lower GST rates and direct tax cuts impact overall transfers from the center.
Effect on Government Expenditure
- The Centre’s expenditure to GDP ratio was at 13.3% in 2014-15, aimed at 14.2% in 2025-26, but might be lower in revised estimates.
- The PM-Kisan scheme budget decreased from 0.30% of GDP in 2020-21 to 0.18% in 2025-26.
State-Level Fiscal Challenges
- States are reallocating funds from other areas to accommodate cash transfer schemes.
- The new funding structure under MGNREGA (VB-G RAM G) requires states to cover 40% of costs, reducing their fiscal space.
Future Outlook and Challenges
- Reversing tax cuts is politically challenging, indicating long-term revenue constraints.
- The 16th Finance Commission’s recommendations on tax pool division will significantly impact fiscal dynamics.
- The Pay Commission's award might increase fixed expenditures, limiting other spending areas.
These fiscal constraints suggest a shift towards minimum government operations, with maximum governance remaining a complex challenge.
