An analysis of how the states of India are performing, fiscally, in recent years.
SHARE:
Revenue performance of Indian states - 2021 versus 2020
- The story: A recent analysis of 17 states by experts showed that while states' revenue spending in April-June 2021 was 14% higher than the same period in 2019, own revenues were 8% lower. The April-June quarter (Q1) of 2021-22 was a period of contradictions. It was when India faced the deadliest coronavirus surge since the pandemic began, but it is also when Indian companies made record profits.
- GoI's revenues: The Government of India also earned record revenue, but not the state governments, whose tax revenues were lower than those earned two years ago.
- The 17 states earned Rs 3.11 trillion in Q1FY22, nearly twice the amount in the same period previous year, or the pandemic year 2020-21.
- They had earned Rs 3.38 trillion in Q1FY20. These figures pertain to their own tax revenues (not share from the centre).
- Only three states among the 17 showed higher tax revenues compared to the numbers two years ago: Telangana, Punjab, and Haryana, while those in Gujarat and Rajasthan remained flat. Tax revenue fell for as many as 12 of them.
- Meanwhile, central government’s gross tax revenue grew from Rs 4 trillion to Rs 5.3 trillion over the same two-year period. This includes states’ share in central taxes.
- Even as their tax revenues were eight per cent lower than the figures two years ago, and even their share in tax collected by Centre was 23 per cent lower than two years ago, they did not compromise on revenue expenditure.
- States' spending: Revenue expenditure, or the spending on current items, administrative expenses, salaries and pensions, and most importantly, welfare schemes, rose by 14 per cent over two years. Revenue expenditure was raised in 2020-21 too, by both the Centre and the states, in order to minimise the economic impact of the pandemic. The trend has continued this year, 2021-22.
- Capital expenditure (Capex) was down sharply, which is public spending made on productive assets such as roads, machinery and infrastructure projects.
- Capex is flat compared to two years ago, at Rs 54,000 crore in Q1FY22. It had dropped to Rs 24,000 crore in Q1FY21, as the pandemic urgency had prompted governments to change their spending priorities.
- The Central government spent 77 per cent more than two years ago on capex in Q1FY22, and 27 per cent more than a year ago.
- Kerala has faced the biggest revenue shock, with the state’s own tax revenues 27 per cent lower than two years ago in Q1. Big, industrialised states like Maharashtra, Karnataka, and Tamil Nadu suffered a 10 per cent drop in tax revenue.
- How states earn: Apart from goods and services tax (GST) levied by states as it is by the Centre, states earn their own revenue mainly from sales tax, or value-added tax, state excise duties and stamp duties. Most of own revenue revolves around a few commodities like petrol, diesel, liquor, cigarettes, and houses. It has not recovered in Q1 of FY22.
- Uttar Pradesh, India’s biggest state, led in capital expenditure, with Rs 9,700 crore in Q1FY22.
- Madhya Pradesh comes in a close second, followed by Haryana. Punjab, Jharkhand, and Maharashtra fall short on capex in Q1.
- Devolution figureS: States’ earnings from devolution of central taxes is also substantially lower. The 17 states have reported Rs 68,000 crore as their share in Centre’s gross tax revenue in Q1FY22, lower than Rs 80,000 crore received in Q1 of 2020-21, and much lower than Rs 87,000 crore received in Q1FY20.
- Why so? As the Centre applied the same monthly formula as the pandemic year! The Centre usually shared 7 per cent, or 1/14th of the annual Budgeted devolution to states per month from April to February, followed by payout of the remainder in March, the last month in the financial year.
- While this was the case in 2019-20, the Centre reduced the share in 2020-21 as it was certain that its gross tax revenues will take a hit. It continued with this formula with reduced monthly transfer this financial year too, affecting the devolution in Q1 FY22.
- States may get their fair share July onwards, as devolution rose to Rs 47,500 crore in July, from the monthly average of Rs 39,200 crore in Q1FY22.
- If it continues at this pace till February 2022, it will boost the cash flows of state governments and revenue visibility may help them to front load expenditures, which would support growth.
- However, states are not borrowing extra from the markets.
- Summary: States are where citizens live. Their healthy fiscal situation is imperative for citizen welfare. In the coming months, it would be interesting to see how central devolution works out. Fiscal federalism is key to India's growth.
- EXAM QUESTIONS: (1) Explain the various ways revenues are shared between states and the union government. What trends are seen in the recent years? (2) What are the recommendations of the 15th Finance Commission insofar as revenue sharing is concerned? List and explain. (3) Why are states struggling far more in revenue collection, compared to the Union, post pandemic? Explain logically.
#RevenueSharing #Taxes #Federalism #IndianStates #Capex #Pandemic
COMMENTS