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Centre’s Share in States’ Revenue
Context:
Over the last decade, Indian States have increasingly relied on transfers and grants from the Central government.
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- This shift marks a significant departure from the trends observed in the 2000s and early 2010s, as the share of States’ own tax and non-tax revenue in their total revenue has declined.
Growing Reliance on Central Transfers
- From FY16 to FY25, 23-30% of the total revenue of States came from Central transfers, a notable increase from the 20-24% share recorded in the 2000s and the first half of the 2010s.
- Similarly, the share of non-tax revenue from Central grants rose to 65-70% during the last decade, compared to 55-65% in earlier periods.
- This growing dependence is compounded by diminishing revenue from non-tax sources, excluding Central grants, and the failure of States to optimise their own tax collections.
- Together, these factors have made States increasingly reliant on Central funds.
Decline in States’ Own Revenue
- Over the past decade, States’ own tax revenue as a share of total revenue has consistently remained below 50%.
- This contrasts with the 2000s and early 2010s, when it often crossed or hovered around the 50% mark.
- Own tax revenue includes collections from stamp duty, registration fees, motor vehicle tax, and the State Goods and Services Tax (SGST).
- However, the share of own tax revenue, excluding SGST, has declined from 34% in FY18 to 28% in recent years.
- This highlights the increasing reliance on SGST, which accounted for 15% of total revenue in FY18 and now contributes about 22%.
Non-Tax Revenue Trends
- Non-tax revenue, which includes Central grants, earnings from services, interest receipts, and dividends from State public sector enterprises, is also declining as a share of total revenue.
- It is projected to drop below 24% in FY25, the lowest in 25 years.
- The share of grants from the Centre in States’ non-tax revenue has risen to 65-70% in the last decade, up from 55-60% in the 2000s and early 2010s.
- In contrast, the contribution from interest receipts has fallen below 5%, and dividends from State public sector enterprises have remained under 1%.
- Revenue from services such as public health and power, which exceeded 30% in the earlier period, is only expected to reach that threshold again in FY25.
Declining Own Tax Revenue Efficiency
- A critical measure of tax collection efficiency is the ratio of a State’s own tax revenue to its Gross State Domestic Product (GSDP).
- There is a decline in this ratio for six States: Tamil Nadu, Karnataka, Kerala, Bihar, Delhi, and Madhya Pradesh.
- For instance, Tamil Nadu’s ratio has dropped from 7.72% in FY13-15 to 6.17% in FY22-24.
- While the ratio has improved in Maharashtra, Manipur, Meghalaya, Odisha, and Uttarakhand, it has remained stagnant in other States.
- This indicates that many States have not fully utilised their tax collection potential.
Expert Analysis
- Kausik K. Bhadra, a public finance consultant with UNICEF, observes that stagnant own tax revenue impedes States’ ability to implement counter-cyclical fiscal measures to boost aggregate demand.
- He notes that SGST plays a dominant role in driving States’ own tax revenue, but its rates are set by the GST Council, a body that has often faced criticism from Opposition-led States over its decisions.
- Mr. Bhadra also points out that efforts to improve collections from taxes such as stamp duty and motor vehicle tax have been sporadic and lack technical efficiency.
- He concludes that States’ own tax revenue mobilisation falls short of fulfilling the redistributive goals of macroeconomic tax policies.
However, the declining efficiency in tax collection at the State level raises concerns about their fiscal autonomy and ability to meet rising expenditure responsibilities. Addressing these challenges will require sustained and systemic efforts to improve revenue mobilisation and reduce over-dependence on Central transfers.
