States’ share in central tax pool seen at 50-yr low
They will get ~6.56 trn in FY20 against BE of ~8.1 trillion, shows RE
As the economic slowdown takes a toll on the central government's tax revenues, state governments are being asked to share a bigger burden of the fiscal slippages. The share of states in the central tax pool is set to decline 13.8 per cent year-on-year (YOY) during fiscal year 2019-20 (FY20). This will be the biggest fall in states’ share of central taxes in 50 years, according to the data from the Reserve Bank of India.
The states’ revenue from the central tax pool was up 25.8 per cent YOY in FY19, while it was down 0.4 per cent YOY in FY18. The current fiscal year will only be the third occasion in the past 50 years when states' share in taxes will decline on a YOY basis. The revenue of states had fallen for the first time in FY1998-99 followed by a decline in FY18.
The tax receipt data for central and state governments in only available since FY1970-71.
Lower tax transfer to states spared the central government the blushes as gross tax is estimated to grow by just 4 per cent YOY in FY20, against 16.5 per cent YOY in the central government's total expenditure during the year. As a result, the central government's expenditure is down by only around ~88,000 crore in Revised Estimates for FY20 against a ~3-trillion shortfall in gross tax collections.
Foreign brokerage Credit Suisse (CS) flagged it off as a risk. “States appear to be bearing a large part of the tax slippages. Revenue transfer to states drops by nearly 50 per cent of the cut in gross tax receipt assumptions," write CS analysts, led by Neelkanth Mishra and Prateek Singh.
The central government’s gross tax collections are down by nearly ~3 trillion in the Revised Estimates (RE) for FY20 over the Budget Estimates (BE) presented in the last year’s Budget. Of this, states absorbed a tax blow of ~1.543 trillion. According to the RE, states will now receive ~6.56 trillion from the central tax pool in FY20 against the BE of ~8.1 trillion.
The decline in states’ share in FY20 is similar to the expected decline in corporation tax collection, which is likely to be lower by ~1.55 trillion in the RE for FY20 over the BE.
As a result, the share in central taxes will now account for only 29.6 per cent of states’ total tax revenues, lowest since FY03, when it had hit a low of 29.3 per cent.
Economists say that decline in states share could adversely affect states’ finances besides hitting overall capital expenditure in the economy. “States’ spending on capital expenditure is far larger than the central government capex. After a cut in their revenue share, states will either have to adjust their expenditure to fit lower revenues or they will have to borrow more that will worsen their fiscal math,” says Devendra Pant, head economist India Ratings & Research.
A large part of states’ capital expenditure is towards irrigation, roads, education, health care, water supply and sanitation. The worry is the new fiscal math may force many states to either abandon or defer new projects on these areas adversely affecting the overall capex in the economy.
Additional borrowing by state government is also likely to push up bond yields and interest rates. This in turn will also increase borrowings costs for corporate entities and individuals.