This analysis highlights a growing trend of increased financial dependence of Indian states on the central government.
Key Trends:
Rising Dependence on Central Transfers: States are increasingly reliant on transfers and grants from the central government, with their share in state revenue increasing from 20-24% in the 2000s to 23-30% in the last decade (FY16-FY25).
Declining State Revenue Sources:
Own Tax Revenue: States' own tax revenue as a share of total revenue has stagnated below 50% in recent years, compared to higher levels in the 2000s.
SGST Dependence: A significant portion of state tax revenue now comes from SGST, indicating a reliance on a single source.
Non-Tax Revenue: The share of non-tax revenue in state revenue is declining, with a notable decrease in interest receipts and earnings from state-owned enterprises.
Factors Contributing to Increased Dependence:
Inadequate Tax Collection Efforts: States have not effectively utilized avenues to increase their own tax revenue, such as stamp duty, registration fees, and motor vehicle tax.
Stagnant Own Tax Revenue: The ratio of own tax revenue to GSDP has declined in several states, indicating a need for improved tax collection strategies.
Growing Expenditure Responsibilities: States face increasing expenditure demands, requiring them to rely more on central transfers to fund development programs.
Concerns:
Fiscal Imbalance: The growing dependence on central transfers can lead to fiscal imbalances and limit the autonomy of state governments.
Limited Fiscal Space: Increased reliance on central transfers can constrain states' ability to undertake counter-cyclical fiscal measures to boost their economies.
Political Implications: The dependence on central funds can create political pressures and potential for conflicts between states and the central government.
Recommendations:
Enhance Tax Collection Efforts: States need to improve their tax collection mechanisms, including better enforcement and utilizing technology.
Diversify Revenue Sources: States should explore ways to diversify their revenue sources beyond reliance on SGST.
Improve Service Delivery: Enhance the efficiency and effectiveness of public services to generate more revenue from service charges.
Strengthen Fiscal Federalism: Improve the framework for intergovernmental fiscal transfers to ensure equitable distribution of resources.
This analysis underscores the need for a comprehensive review of the current fiscal federalism framework in India to ensure a more balanced and sustainable relationship between the central and state governments.
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