Central funds transfer to states declined in FY16

The Reserve Bank of India (RBI) on Thursday said implementation of the 14th Finance Commission recommendations reduced the transfer of central funds to states by 0.3 per cent of GDP in the last financial year even as it made a case for an early rollout of the goods and services tax (GST) regime for increasing the revenue of states on a sustained basis.

"The increase in states' share of tax devolution from 32 per cent to 42 per cent of the divisible pool on the recommendation by the Fourteenth Finance Commission works out to a decline in consolidated state revenues from central transfers by 0.3 per cent of GDP in 2015-16...," said RBI's report, 'State Finances: A Study of Budgets of 2015-16'.

The decline is due to discontinuation of many centrally sponsored schemes announced in the Budget 2015-16.

Referring to GST, the report said that despite several reform measures, goods and services continue to be bogged down with several indirect taxes at different stages of the value chain with significant tax cascading. So, a need to introduce a consumption-based destination-centric GST has been strongly felt and a proposal for its introduction was first mooted in Budget 2006-07. Given that states have limited manoeuvrability in raising tax revenues, "the introduction of GST would have a lasting impact on revenues of states", the report said.

It said expenditure quality at the sub-national level in India has somewhat improved with the implementation of fiscal responsibility and budget management (FRBM) rules.

"At the same time, the existing levels of high revenue and non-development expenditure in states' total spending is of concern as it can inhibit growth at the state level," the report said.

According to the report, fiscal consolidation by states should emphasise revenue augmenting measures, improving the viability of discoms and rationalisation of centrally sponsored schemes, while reining in slippages in the gross fiscal deficit (GFD) from the path of fiscal discipline and the double digit growth in outstanding liabilities of state governments.

The report further said market borrowings would continue to remain the major source of financing the GFD of states, with its share set to increase significantly. Over the years, the contribution of public account items like "deposits and advances" and "suspense and miscellaneous" in GFD financing has declined.

It also made a case for reforming state level public enterprises for improving state finances.

Over the last decade, it further said there has been some improvement in the quality of expenditure but with considerable dispersion across states.

"A disconcerting feature is the stagnation in expenditure on education and health. Larger investment in education and health is a prerequisite for harnessing the benefits of a rapidly increasing young work force for gainful and productive allocation of human capital," the report said.