Centre shifts financial burden as states' fare better on fiscal front

Both devolution of taxes to states as well as grants from Centre have gone up in last few years

State and the union governments were deliberating over some crucial issues at the National Development Council (NDC) meeting at Vigyan Bhawan in December last. Suddenly, Tamil Nadu Chief Minister Jayalalithaa walked out of the closed-door meeting, complaining the Centre was stifling voice of states.

While her reaction was triggered by a trivial issue that state chief ministers were not allowed to speak beyond their allotted ten minutes, some recent decisions by the Centre left many states complaining. And these are not related to security issues, which caused a rift between the UPA and BJP on Wednesday, but shifting of financial burden to states by the Centre.  

Certainly, both the devolution of taxes to states as well as grants from the Centre have gone up in the last few years, but off late the Union government, which is not in the pink of the health, is making states share some of its financial burden. It started with the Centre asking the states to guarantee bonds to be issued by power discoms as part of a bailout package and later extended it to sharing of subsidy burden on sugar and food, and also the losses on account of reduction of Central Sales Tax (CST).   

Though it is not a conscious decision to make states bear a part of the Centre’s financial burden, the finance ministry believes states are in a condition to do so and that their sound financial health is mainly because of a larger flow of funds from budgetary sources as well as taxes. Most states have a fiscal deficit of less than 3%, and as their borrowing ceilings are fixed, they can’t go above this level.

“About 60% of the Central Plan is going to states. The aggregate cash balance is over Rs 1.5 lakh  crore in states’ treasury bills, which is not the case with the Centre. Even if states share the burden largely the money will come from the Centre. It is collective responsibility of both,” said an official of the union government.

Union government officials also argue that states have not done enough to generate revenue from their own resources. According to a report by the Reserve Bank of India on ‘State Finances’, there has been a marginal increase in tax collections by the states after the implementation of the FRBM Acts, but states have not made serious efforts towards increasing their tax revenues in the fiscal consolidation phase.

A preliminary analysis of own tax revenue-GSDP ratio of the non-special category states revealed that the average own tax revenue-GSDP ratio during the fiscal consolidation phase (2004-2008) at 6.9% was marginally higher than the 6.7% in the pre-consolidation phase (2000-2004). In recent years (2010-2013), the average own tax revenue-GSDP ratio has increased to 7.2%

While a finance ministry official said states are merely addressing populist consequences rather than mproving their revenue growth parameters, states, on the other hand, said they have their own limitations in supplementing revenues from their own resources. 

“States also do their own resource moblisation. But we have to keep many factors in mind. We put so much money in infrastructure, subsidise agriculture and give various incentives. CST forms a very strong component of state revenues. It’s fair on part of the states to demand CST compensation,” says Haryana Excise & Taxation Minister Kira Choudhry.

Dinesh Agarwal, Minister of Planning, Uttrakhand, a hilly northern state, said newly-born states have problems in building infrastructure and there revenue sources are limited.

“We have so much forest land but also a large eco-sensitive area. We need green bonus. Disasters trouble a lot. There is a flood every year. So we need Central assistance to rehabilitate people immediately. The Centre also has limited resources but it should not shift the liability to special category states,” he said.

The Centre has approved only 75% CST compensation for 2011-12 and 50% for 2012-13 and has not given any clarity on compensation for the current year. While decontrolling sugar recently, it said extra burden of subsidy would have to be borne by the states in event of a price rise. Besides, the Food Security Bill, when enacted, will require states to bear the additional subsidy burden if it chooses to supply food grains at a price lower than what has been fixed by the Centre.  

Finance ministry officials, however, said all these measures might not affect state finances as there was no evidence yet to prove that there would be losses.

“Except West Bengal, which has a legacy, in most of the states problems are self created. Why should Punjab have any problems when it has a rich agricultural land? It has got the highest paid bureaucracy in the country. If states have any issues they can go to the 14th Finance Commission,” summed up an official of the union government.