Centre advances devolution as states hunt for funds, transfers Rs 1.16 trn

Money will help carry out their capital expenditure and welfare spending plans

The Centre on Wednesday released Rs 1.16 trillion in devolution to states, instead of the usual monthly practice of Rs 58,333 crore.

It is a clear indication that owing to healthy direct tax and goods and service tax collections, the Centre is frontloading devolution to states from the divisible tax pool. The step will help carry out their capital expenditure and welfare spending plans.

Two installments of devolution were paid in November 2021 as well, after Finance Minister Nirmala Sitharaman met with her state counterparts and chief ministers on economic and infrastructure issues.

By norm, money from the divisible tax pool is devolved to states in 14 annual installments: 11 in 11 months and 3 in March.

The latest devolution comes after several states told the Central government that they face a fund crunch that is leading slowing down infrastructure projects.

Kerala Finance Minister K N Balagopal two weeks ago wrote to Sitharaman, accusing the Centre of putting his state in a financial crisis by slashing its resources by Rs 23,000 crore in the current fiscal year.

He said that the Centre had done so by reducing revenue deficit grants, ending goods and services tax (GST) compensation from July, and factoring in borrowings by state entities and public account liability while fixing borrowing limits of states.

At the centre of these conversations is the extension of GST compensation to states beyond June 2022. However, that is unlikely to fructify.

Experts have said the Centre should frontload devolution to states from the divisible tax pool as direct tax and GST collections are robust. They warned that the states may not be able to incur capex and fund their social welfare schemes if their share is transferred later in the year.

The Centre collected Rs 5.68 trillion in taxes in the first quarter of the current fiscal, which was 22.4 per cent more than that collected in the corresponding period of the previous year. Union Budget Estimates pegged growth at just 1.8 per cent year-on-year for the entire FY23 (compared to actual numbers in FY22).

“We anticipate that central tax devolution will overshoot the FY23 Budget Estimates by over Rs 1 trillion, led by an expected upside in the Government of India’s non-excise tax revenues. If the upside is deferred to Q4 FY23, as was seen in Q4 FY22, it may not translate into a healthy capex push by the states, given the lead time required to plan and execute projects. An early reassessment of the monthly amounts being shared with the states may nudge them to boost their spending and support economic growth,” ICRA chief economist Aditi Nayar said.