ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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The State of State Finances

Only a generous award by the Fifteenth Finance Commission can restore fiscal balance.

State finances are in dire straits. A reliable indicator of this is the steady rise in state debt after a long hiatus. Total debt of the states has gone up by 4.6 percentage points of the gross domestic product (GDP) over the last six years, as highlighted in the recent report on state finances by the Reserve Bank of India (RBI), from a low of 22% of the GDP in 2014–15 to touch a peak level of 26.6% as per the budget estimates of 2020–21. The rapid build-up of the state debt is a sharp reversal of the previous trends when the state debt shrunk by around 10 percentage points of the GDP from a peak level of 31.8% in 2003–04. Moreover, the pace of growth of the debt burden of the states was almost four times faster than that of the central government whose debt levels have only edged up by 1.2 percentage points of the GDP, from a low of 49.4% of the GDP in 2017–18 to 50.6% in the budget estimates for 2020–21.

The sharp acceleration of the state debt, as compared to that of the centre, indicates that deterioration in state finances has certainly to do with something much more than just the slowdown in the economy. One important reason for the fiscal distress in the states is the compression in the resource flows from the centre to the states. Though the Fourteenth Finance Commission has substantially increased the state’s share of central taxes from 32% to 42%, the central government has unfortunately thwarted the commission’s mandate by mobilising additional resources through non-shareable cesses and surcharges. By one count, the use of non-shareable cesses and surcharges by the centre to mobilise additional resources has effectively reduced the state’s share of the central taxes, from 42% assigned by the Fourteenth Finance Commission to just 32%. Similarly, the cut in corporate tax rates and goods and services tax (GST) rate cuts, as prompted by the centre, have also negatively affected resource flows to the states.

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Updated On : 24th Nov, 2020
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