Although India’s economy is growing rapidly and is counted among the top-5 economies of the world there is a smell of economic instability in some states of the country.
If we look at the financial condition of the states, most of them have taken loans in excess of the limit.
The economic condition of the states can be gauged from many reports.
- According to an RBI report, in the financial year 2021-22, the financial debt of all the states of India has reached 31.2 percent of GDP.
- In the year 2014-15, the financial debt of the states was 21.7 percent of the GDP.
- In 2018, the Parliament approved the Fiscal Responsibility and Budget Management Act.
- According to its provisions, a loan of up to 60 per cent of GDP by the year 2024-25 was considered appropriate.
- In this, the limit of 40 percent was for the central government and the limit of 20 percent was for the states.
- But the percentage of financial debt of the states has gone way beyond the limit of 20.
- The 15th Finance Commission had decided that in the financial year 2022-23, the central government will distribute financial assistance of Rs 86,201 crore to such states, where the condition of financial deficit persists, but in the coming years, this financial amount of the central government will decrease. There will be a provision of
- At present, 7 states of India – Andhra Pradesh, Himachal Pradesh, Kerala, Punjab, Rajasthan, Tripura and West Bengal are already running through fiscal deficit.
- In the coming times, Assam, Meghalaya, Mizoram, Nagaland, Sikkim and Uttarakhand are also going to depend on the central government for financial assistance.
- Haryana, Karnataka, Madhya Pradesh, Maharashtra and Tamil Nadu will also go through a difficult situation if the central government reduces the amount of financial assistance in the coming years.
After all, why are the conditions of the states becoming like this? One thing is surprising here that in almost all the states, the financial loss from the power sector is very high.
Explain that salaries, pensions, interest and subsidies are included in revenue expenditure, but these expenses do not create any asset from which any kind of income is generated.
The ever-increasing debt interest is taking up a significant portion of the revenue expenditure.
Due to this, it is becoming difficult to spend on other dimensions necessary for economic development like agriculture, infrastructure development, quality in education, etc., which may even become impossible in future.
The only source of direct income of the states is taxes . After the introduction of GST, there has been a reduction in the taxing rights of the states.
It is having economic side effects on the states in two ways-
- One, the total gross collection of the tax till 2015-16 was 6.7 per cent of the GDP ratio. After the introduction of GST, it has been continuously decreasing. It was 5.9 percent in the year 2021-22. One of the main reasons behind this is also the reduction in the tax rate.
- Two, according to the 13th Finance Commission report, the average gross tax collection from 2010-11 to 2014-15 was 32 per cent and 28 per cent of it was devolved to different states. On the other hand, during the 14th Finance Commission, from the year 2015-16 to the year 2019-20, the average tax collection was 42 percent, while the transfer to the states was only 34.8 percent.
Now in the current 3 years of the 15th Finance Commission, the situation seems to be getting worse.
From the year 2020 to 2022, the average gross tax collection has been 41 percent and only 29.66 percent has been transferred to the states.
Certainly, over the years, the states have been getting comparatively less of their share in tax collection.
Due to this also their revenue deficit is increasing.
Due to lack of any other major source of income, they have to get entangled in the web of financial debts.