Hanging by a Thread

My Sunday reverie was rudely interrupted by the ‘ding’ that signals incoming mail. The report attached to this Sunday e-mail was ruder still, making me forget my 40 winks and aperitif. The highlights were stark: “States’ revenue revives, but deficit levels rise after COVID. States have limited discretion in raising revenue and planning expenditure. Emulating the Centre’s unified pension scheme (UPS) payouts will involve additional expenditure.”

Bottomline: India’s states are in trouble. For the uninitiated, states spend 1.5 times what the Centre does. For 2024-25, nine states have allocated a Rs 1-lakh-crore spend on unconditional cash transfer schemes for women. This scheme alone amounts to 11 per cent of revenue receipts in Karnataka and 9 per cent in Maharashtra. If continued, it will play havoc with any economic juggling or wizardry. Top this with UPS, and the states will be maimed.

Revenue Deficits and Borrowings All Around

The report by PRS Legislative Research shows that 11 of India’s states have forecast a revenue deficit, which means they need to borrow even for expenditure on heads like salaries, pension and interest payouts. These items alone comprise 52 per cent of the states’ revenue receipts for 2024-25 (budget estimates).

In the post-COVID period, states’ own revenue has revived to levels seen in 2018-19, and in 2023-24, the SGST (State GST) revenue-to-GDP ratio was higher than in 2018-19. That’s good news. Revenues from SGST accounted for about 40 per cent of states’ own tax revenue, but the ground reality is that most states don’t receive their share of GST collections. That’s not very good news.

Relief came from the Supreme Court in July, when the authority of states to tax mineral rights was upheld. Simply, that means states can get revenue by imposing levies on minerals. But there’s a problem here—iron ore or bauxite, coal or chromite, manganese or sand, most states are mired in controversy and allegations of rampant corruption. This means that revenues are being collected and they are reaching someone… just not the exchequer.

State-Level Economic Disaster in The Making

The predictable fallout of all of the above (plus other headaches, some listed below) is that a state-level financial disaster is sitting in a pot with the burner in ‘simmer’ mode. The economic pressure cooker is bound to hiss out warning toots soon; shortly after, we could see sinkholes appear and gobble up anyone close to ground level. As is wont, that will be the common man, state government employees, small and medium enterprises, and large businesses.

All projections on revenue receipts, expenditure, deficits, liabilities and outlays announced in state budget estimates for 2024-25 point to a fracture. For one, expenditure is budgeted to be 84 per cent of total spend, while capital outlay is at 16 per cent. States project they will raise 58 per cent of revenue receipts from tax and non-tax sources, with SGST being the King, at 44 per cent of total receipts. With the King remaining elusive, his subjects are bound to suffer.

‘Discoms & Borrowings’ Straws Killing the Camel

There’s more. States raised 11 per cent less revenue and spent 10 per cent less than budgeted between 2015-16 and 2022-23. Average under-spending in capital outlay was 21 per cent, and losses at discoms (power distribution firms) were higher due to power purchase costs. Losses at state-owned discoms doubled year-on-year in 2022-23, on the back of higher purchase prices driven by increased dependence on costlier imported coal. These losses are already beginning to pip investments in upgrading electricity distribution infrastructure.

Mounting deficits have seen borrowings being increased to sustain expenditure, sending total liabilities surging from 25.3 per cent of the GDP (Gross Domestic Product) in 2018-19 to 31 per cent of GDP in 2020-21. Since then, revenue levels have improved, but the latest figures are still below those seen in 2018-19.

A key reason for this is that while states’ own revenues returned to levels achieved in 2018-19, central grants were lower due to the discontinuation of GST compensation grants and lower devolution. Total central transfers fell significantly, from 6.4 per cent of GDP in 2018-19 to 5.5 per cent of GDP in 2023-24. The only silver lining—state budgets of 2024-25 project an improvement in revenue receipts. The not-so-silver lining—these are only ‘estimates’.

Finance Commission and Prayer Could Help

Against this backdrop, the only help can come from landmark policy-making initiatives and far-sightedness, studded with good intent and a will to reform. In the absence of boldness, what could help are state-level economy-boosting measures, business strategies to raise monies, the Finance Commission, and prayer.

The Constitution empowers the President to form a Finance Commission every five years, with the panel indorsing the distribution of tax collections between the Union and states. It also provides recommendations for giving grants-in-aid to states from the Union, as and when required. The 16^th Finance Commission, chaired by Dr Arvind Panagariya, was notified by the Centre in December 2023 and will submit its report by October 31, 2025, containing recommendations for a five-year period beginning on April 1, 2026.

Currently, the recommendations of the 15th Finance Commission (chaired by Mr NK Singh) are in effect till March 31, 2026. This panel had suggested the states’ share in central taxes at 41 per cent of divisible taxes. If that one recommendation is persisted with and implemented, along with full sharing of the SGST share, that could catalyse a resurgence. If it is…

None other than Muhammad Ali Jinnah once said: “India is not a nation, nor a country. It is a subcontinent of nationalities.” Jinnah said this as a compliment, underscoring India’s unity in diversity and cultural richness. For India’s financially-beleaguered states, now is the time to use that unity to teeter back from the precipice and hoist the economic flag again.

—     The writer is a veteran journalist and communications specialist.