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Containing subsidies: States must Reassess and Rationalise Expenditure
Context:
Subsidies are crucial for welfare in India, but their impact on state finances, especially post-pandemic, has raised concerns.
- A recent study by the National Institute of Public Finance and Policy highlighted the need for better financial management by state governments.
Factors Constraining State Finances:
- GST Implementation: Limited state tax revenue generation post-GST implementation due to reduced taxing authority.
- Committed Expenditures: 60-80% of state budgets (2017-2020) are tied to essential services, salaries, and interest payments, leaving little room for discretionary spending.
- Burden of Explicit Subsidies: Explicit subsidies (financial aid, insurance, etc.) heavily strain state budgets and limit resources for infrastructure and investment.
Challenges in Subsidy Management:
- Poor Targeting: Inefficient subsidy distribution.
- Lack of Transparency: Opaque subsidy distribution and utilisation.
- Debt Relief and Free Power Supply: Financial strain on state electricity boards due to subsidies.
- Interest Subsidies: Further strain on state finances.
Fiscal Position of Indian State Governments:
- Over-Reliance on Own Revenues: State tax revenues form about half of total revenues, and deviations in growth impact overall revenue.
- Devolution from the Centre: 40-45% of state revenues come from central transfers, with recent years seeing higher-than-expected tax devolution.
- Improved Tax Buoyancy: Post-2017, SGST is the primary state tax revenue source, with recent improvements in tax buoyancy.
Concerns in State Financial Management:
- Significant Variation in Grants: Actual grants often vary significantly from budget estimates, particularly in Centrally Sponsored Schemes (CSS).
- High Debt Issuance: States have increased borrowing, leading to potential fiscal risks.
- Low Capital Spending: Capital spending is expected to start slowly in 2024, influenced by election timing and monsoon season.
- Technical Inefficiency in Tax Collection: High inefficiency in collecting state taxes like stamp duty and excise duty due to complex rate structures.
- Lack of Uniformity in Motor Vehicle Tax: Variations across states in motor vehicle tax lead to inconsistencies and revenue shortfalls.
- Resorting to Non-Tax Revenue: States are increasingly relying on non-tax revenue measures like e-auction of mining leases.
- Concerns Related to Cess and Surcharge: Revenue from cess and surcharge, which is not shared with states, has increased significantly.
Suggestions for Improving State Finances:
- Balanced Revenue Mobilisation: Increase Own Tax and Non-Tax Revenues without burdening the public, ensuring alignment with state priorities.
- Private Investment in Less Developed States: Focus on attracting private investment to less developed states like Chhattisgarh.
- Adoption of 12th Finance Commission Recommendations: Implement multi-dimensional restructuring of government finances, including tax reforms, rationalising subsidies, and strengthening local bodies.
- Rationalising Revenue Deficits: Avoid using capital receipts for revenue expenditure and focus on increasing investment.
- Harnessing Royalty Rates on Minerals: Regularly revise and levy ad valorem royalty rates on minerals to boost state revenue.
Conclusion:
State governments must adopt multi-faceted approaches, including better revenue mobilisation, prudent fiscal management, and efficient resource utilisation, to improve their financial positions and better serve citizens.
