Shift in State Financing and Fiscal Autonomy
The Union Budget's role in influencing State finances is diminishing, as evidenced by the rising dependence on State Development Loans (SDLs) for financing day-to-day expenditures.
Key Points
- SDLs accounted for about 35% of Tamil Nadu's and nearly 26% of Maharashtra's total revenue receipts in the 2024-25 fiscal year.
- This dependency on borrowing increased post the COVID-19 pandemic, indicating a shift from Central tax devolution to SDLs.
- Despite the 15th Finance Commission setting States' share at 41% of the divisible pool, increased use of cesses and surcharges, which are excluded from this pool, has reduced effective resource flow.
Impact on Industrialised States
- Introduction of GST in 2017 shifted a significant share of indirect tax revenue collection to the Centre, weakening the fiscal link between tax effort and reward.
- States are increasingly funding welfare commitments, such as pensions and health insurance schemes, through domestic borrowing.
- This borrowing limits funds available for public capital expenditure and private investment, crucial for growth.
Comparative Analysis of Borrowing Patterns
- States like West Bengal, with a high dependency on Central devolution (averaging 47.7% of revenue receipts over five years), continue heavy borrowing.
- SDLs formed around 35% of West Bengal's revenues during this period, despite nominal tax devolution increases.
Macroeconomic Consequences
- The trend signifies a steady erosion of States' fiscal autonomy, with rising debt-to-GSDP ratios.
- If debt becomes the primary shock absorber instead of devolution, India's fiscal sustainability could face significant strain.
Recommendations
- Increase effective devolution and revisit horizontal devolution criteria to emphasize tax effort and efficiency.
- Bring cesses and surcharges into the divisible pool to enhance resource allocation to States.
