In the intricate web of India’s governance, a tension-laden dance unfolds between the central and state governments, particularly in states led by the Opposition. Beyond the political theater, the battleground has shifted to the allocation and distribution of monetary resources, putting the dream of cooperative federalism to a rigorous test.
A Delicate Fiscal Balance
One cannot ignore the fiscal tightrope where state expenditures dwarf those of the Centre. For the current fiscal year, while the Centre allocates Rs 45.03 lakh crore, states collectively aim higher at Rs 50.22 lakh crore. Intriguingly, the economic repercussions of states’ spending are profound, with a 1 percent increase in state revenue expenditure projected to inject a 0.6 percent boost to the GDP.
However, beneath this apparent fiscal vigor lies a struggle for financial autonomy. Despite schemes offering states long-term, interest-free loans for capital expenditure, accusations persist that states are witnessing a reduction in control over their revenues, a friction amplified by the implementation of the Goods and Services Tax (GST) in 2017.
Economic Self-Reliance or Central Dependency?
A closer look at the landscape reveals a nuanced picture. The Reserve Bank of India (RBI) reports a recent uptick in states’ own tax revenue as a percentage of their overall tax revenue, reaching 65.4 percent on average. Yet, economists caution against complacency, highlighting a stagnation in states’ own tax revenue as a percentage of Gross State Domestic Product (GSDP) and its failure to reach pre-GST levels as a share of total tax revenue.
On the borrowing front, a stark contrast emerges. The Centre, flexing its fiscal muscles during the COVID-19 pandemic, showcased the ability to borrow freely. In contrast, states face constraints, with a capped borrowing limit and a fiscal deficit threshold of 3 percent of GDP. The inherent question of fiscal equity looms large.
The Cess Conundrum
Adding complexity to the financial tapestry is the issue of cesses and surcharges. The Centre’s access to a resource pool not shared with states, fueled by the proliferation of charges like the Agriculture Infrastructure and Development Cess, Road and Infrastructure Cess, and Health and Education Cess, presents a growing concern. This pool has swelled to 17.7 percent of the Centre’s gross tax revenue in 2021-22, up from 6.4 percent in 2011-12.
This asymmetry has impacted the actual tax devolution to states, falling to 78.9 percent of gross tax revenue in 2021-22 from 88.6 percent in 2011-12, as recommended by the 14th Finance Commission.
Towards Cooperative Fiscal Federalism
As India charts its course towards developed status by 2047, the concept of cooperative federalism demands a careful balance and collaboration between the Centre and states.
