Context
- Economic Trajectory:
- 2010s: Many States prospered through reforms, improved tax collection, and booming growth, some reporting revenue surpluses.
- Pandemic Impact: Shrinking tax revenues and soaring emergency expenditures pushed almost all States back into fiscal stress.
- Significance: States control budgets larger than many countries, spending more than the Union government on health, welfare, and infrastructure, highlighting the importance of fiscal prudence.
Relevance:
- GS-2 (Governance): Fiscal federalism, intergovernmental transfers, state accountability.
- GS-3 (Economy & Public Finance): Revenue generation, borrowing, debt management, welfare spending, fiscal prudence.
Revenue Generation & Vertical Imbalance
- Internal Revenue Dependence:
- Maharashtra: 70% of receipts generated internally (2022–23).
- Arunachal Pradesh: Only 9% internally, relying on Union transfers.
- Uttar Pradesh: 42% internally, despite reporting a ₹37,000 crore surplus.
- Sources of Volatile Revenue:
- Kerala: Lottery industry – ₹12,000 crore.
- Odisha: 90% of non-tax revenue from mining royalties.
- Telangana: Land sales – ₹9,800 crore.
- Issue: Overreliance on volatile and one-time revenue sources masks true fiscal stability.
Borrowing & Debt Patterns
- Borrowing Trends (2016–17 → 2022–23):
- Rajasthan: ₹43,889 crore → ₹1,60,565 crore (debt ~40% GSDP).
- Tamil Nadu: ₹66,143 crore → ₹1,01,062 crore (~33% GSDP).
- Telangana: ₹44,819 crore → ₹1,26,884 crore (~28% GSDP).
- Uttar Pradesh: ₹67,685 crore → ₹66,847 crore (~31% GSDP, slightly reduced).
- Tripura & Uttarakhand: Borrowings low but debt >30% GSDP.
- Pandemic Spike: Borrowings increased universally during COVID; post-pandemic strategies diverged:
- Increase: Andhra Pradesh, Rajasthan, Telangana.
- Reduce/Cut: Karnataka, Kerala, Maharashtra.
- Maintain/Moderate: Odisha, UP, Tripura.
The Welfare Paradox
- Surplus ≠ Development:
- Many States with reported surpluses rely heavily on central transfers, off-budget loans, and delayed GST compensation.
- Surpluses may be accounting gains, not necessarily developmental gains.
- Deferred Costs & Fiscal Stress:
- UP & Andhra Pradesh: Free power and farm waivers financed via special purpose vehicles and guarantees.
- Punjab: Chronic debt issues.
- Kerala: Dependency on volatile lottery revenues.
- Fiscal Illusion: Corporate tax cuts, GST cesses, and rebranded social spending mask the true burden on State finances.
Policy & Governance Implications
- Need for Fiscal Prudence:
- Prioritise capital expenditure for growth while keeping routine costs in check.
- Adaptive Revenue Planning:
- Reduce dependence on volatile sources like land sales, lotteries, and mining royalties.
- Welfare-State Management:
- Balance social spending with fiscal sustainability; ensure direct developmental outcomes rather than politically symbolic transfers.
- Vertical Fiscal Imbalance:
- Poorer States reliant on Union transfers; rich States maintain autonomy.
- Calls for reform in GST compensation mechanisms and intergovernmental fiscal transfers.
