Introduction
The fiscal health of Indian States is a key determinant of development outcomes, as States collectively spend more than the Union Government on health, education, and welfare. The recent decadal analysis by the CAG highlights the post-pandemic fiscal stress, rising borrowings, uneven revenues, and the emerging welfare paradox.
Trends in Fiscal Health
●
2000s Deficit
Phase: Many States ran high deficits, spending beyond revenues.
●
2010s Recovery
Phase: Reforms, GST compensation, and buoyant growth improved fiscal
balance; some States even posted surpluses.
●
Post-Pandemic
Shock: Shrinking tax revenues and emergency spending pushed States back
into stress.
Revenue Patterns
●
Rich vs. Poor
States: Maharashtra generated ~70% of receipts internally; Arunachal only
9%.
●
Vertical
Imbalance: Poorer States rely heavily on Union transfers (e.g., UP
generated just 42% on its own despite a surplus).
●
Volatile
Sources:
○
Kerala
→ Lotteries (₹12,000 cr in 2022-23)
○
Odisha
→ Mining royalties (90% of non-tax income)
○
Telangana
→ Land sales (~₹9,800 cr)
○
Risks
→ lotteries depend on sales, royalties on global prices, and land cannot be
sold twice.
Borrowing & Debt
●
High-Borrowing
States: Andhra Pradesh (35% of GSDP), Bihar (39%), Rajasthan (40%), Punjab
(45%).
●
Moderate-Borrowing
States: Gujarat (~19–20%), Maharashtra (~20%), Odisha (~15%).
●
Small States’
Stress: Nagaland, Mizoram, Manipur carry 40–60% debt-to-GSDP, despite small
absolute numbers.
●
Post-Pandemic
Divergence:
○
Andhra, Rajasthan,
Telangana → continued high borrowing.
○
Odisha, UP, Tripura →
reduced borrowings.
○
Karnataka, Kerala,
Maharashtra → cut back after peak borrowing.
The Welfare Paradox
●
Many States show
surpluses on paper, but this is often due to:
○
Central transfers and GST compensation.
○
Off-budget borrowings and guarantees.
○
Deferred costs (free power, farm waivers).
●
Under-spending
on welfare: Surpluses do not always translate into better schools,
hospitals, or rural infrastructure.
●
Populist vs.
Fiscal Prudence: Schemes like PM-KISAN, Ujjwala, and Ayushman Bharat
project welfare expansion, but actual State fiscal bases remain thin and
borrowing-dependent.
Challenges Ahead
1.
High debt-to-GSDP ratios in several States, limiting
fiscal flexibility.
2.
Dependence on volatile revenues (lotteries, land,
royalties).
3.
Vertical
fiscal imbalance → poorer States over-dependent on Delhi.
4.
Populist pressures vs. fiscal prudence in welfare
delivery.
Constitutional &
Institutional Context
●
Article 293: States
can borrow, but subject to Union approval if indebted to the Centre.
●
Finance
Commission: Decides
vertical and horizontal distribution of tax revenues → critical for addressing
fiscal imbalances.
●
FRBM Acts
(Fiscal Responsibility and Budget Management): Both Centre and States are bound by fiscal
deficit and debt targets → many States are breaching limits.
GST & Fiscal
Autonomy
●
Introduction of GST (2017) reduced States’ fiscal
autonomy.
●
States lost powers over key indirect taxes (VAT on
goods).
●
Dependence
on GST Compensation Cess till 2022 → after expiry, many States face structural
revenue gaps.
Federal Tensions in
Fiscal Policy
●
Vertical Fiscal
Imbalance (VFI): Rich States fund themselves, poor States depend on
transfers.
●
Horizontal
Imbalance: Variations in fiscal capacity even among States of similar size.
●
Growing Centre-State tensions on GST compensation,
centrally sponsored schemes, and cess-heavy taxation by Centre.
Macroeconomic
Implications
●
Rising debt burdens threaten India’s macroeconomic
stability if left unchecked.
●
High
revenue expenditure (subsidies, free electricity, populist schemes) → crowds
out capital investment (roads, health infra, irrigation).
●
Fiscal fragility may lead to rating downgrades, higher
interest costs, and investor hesitation.
Emerging Issues in
State Finances
●
Off-budget
borrowings: Guarantees to State PSUs create hidden liabilities.
●
Power sector
subsidies: Free
electricity in Punjab, Andhra, Telangana → long-term unsustainable.
●
Welfare populism
before elections: Farm loan waivers, freebies worsen fiscal stress.
●
Climate-related
spending: Rising need for adaptation (floods, heatwaves) adds to fiscal
pressure.
Reform
Measures & Way Ahead
●
Enhancing tax
buoyancy: Digitisation, property tax reforms, plugging GST leakages.
●
Prioritising
capital expenditure: Evidence shows capital spending yields higher growth
multiplier than subsidies.
●
Transparent
accounting: Bring off-budget borrowings and guarantees onto the budget
books.
●
Cooperative
Federalism in fiscal matters: Strengthen GST Council, empower States in
resource mobilisation.
●
Revisiting
Finance Commission formula: More weightage to fiscal effort, not just
population or income.
Broader
Perspective
●
India runs one of the largest welfare states globally
with one of the thinnest fiscal bases among middle-income economies.
●
Paradox: Rising social expenditure +
weak revenue → fragile fiscal federalism.
●
For India’s growth trajectory towards a $5 trillion
economy, sustainable State finances are essential.
Way Forward
●
Broaden States’ own revenue base (property tax reforms,
rationalising GST compensation dependence).
●
Encourage capital expenditure over revenue expenditure
to boost long-term growth.
●
Monitor and regulate off-budget borrowings and
guarantees for transparency.
●
Strengthen
fiscal federalism: better revenue-sharing, reducing vertical imbalance.
Conclusion
The macro-fiscal health of States is at a crossroads: while welfare demands are rising, fiscal capacity remains limited and uneven. Balancing fiscal prudence with social responsibility, expanding States’ revenue autonomy, and reforming borrowing practices are essential for ensuring that India’s development model remains inclusive, sustainable, and resilient.
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