States likely to face crisis as govt pegs tax share at 30%

The 15th finance commission (FC) mandates a share of 41% in the Centre’s tax revenues for the states. The 2021-22 Budget Estimates (BE) figures put states’ share in central taxes at ₹665,563 crore. With Gross Tax Revenues expected to be ₹2,217,059 crore, this share comes to 30%. While this is a slight improvement compared to the 28.9% share for 2020-21 Revised Estimate (RE) numbers, it is the lowest since the implementation of the 14th FC recommendations in 2015-16. At a time when states have done most of the heavy lifting to deal with the pandemic’s impact, this could worsen the crisis facing state finances.

It is also important to look at the absolute devolution to the states from the centre. The states received around ₹650,000 crore from central taxes in 2019-20. This number went down to about ₹549,000 crore in 2020-21. According to data given in the Reserve Bank of India (RBI) study of state budgets released in October 2020, states had factored in ₹703,000 crore in 2019-20 and ₹817,000 crore in 2020-21 under this head.

A continuous shortfall in tax devolution from the Centre will not just impact state finances in the next fiscal year, but also put a retrospective financial burden on the states. This is bound to create headwinds for state spending in the next fiscal year.

While a large part of the squeeze on fiscal devolution is because of a shortfall in central tax collections, the states have been forced to bear a disproportionate burden of this fall, as the Centre did not share windfall gains from additional duties and cess imposed on products such as petrol and diesel. This can be seen from the fact that while Gross Tax Revenues of the Centre fell by 5.5% between 2019-20 and 2020-21 (RE), the Centre’s net taxes suffered a contraction of just 0.9%.

To be sure, the Budget has provided a cushion to the states on the capital expenditure front by providing more than ₹2 lakh crores to states and autonomous bodies for their capital expenditure over and above the ₹554,000 crore capital spending that has been earmarked. The Budget speech also mentions working out “specific mechanisms to nudge states to spend more of their budget on creation of infrastructure”. In addition, there is also a discussion about working out an incentive package of central funds for states which agree to disinvest their public sector companies.

Reacting to the budget announcements, West Bengal finance minister Amit Mitra said, “The Budget has not given anything to states, which is surprising as the finance minister often say that states are at the ground level and better placed to implement welfare works. I had written a letter to the Union finance minister before budget seeking help of the centre, but nothing came.”