Date: 27/04/2023

Relevance: GS-2: Issues and challenges pertaining to the federal structure

Key Phrases: Centre-State resource transfers, Finance Commission, Rate of growth of Central taxes, discretionary transfers, capital expenditure, non-tax transfers, reliance on cess and surcharges.

Why in News?

• The Centre-State resource transfers have always been a subject of considerable debate, and it has been argued that the Centre has encroached into the domain of the States.
• However, the data suggest that transfers to the States have by and large has been fair.

Unpacking the trends

• Central tax transfers:
  • The overall share of the States in Central taxes has fallen short of the Finance Commission's recommendation during the 13th, 14th, and 15th Finance Commission award periods.
• Actual transfers compared to recommendations:
  • The 14th Finance Commission had recommended that 42% of net taxes be transferred to the States, but this share was reduced to 41% by the 15th Finance Commission due to Jammu & Kashmir becoming a Union Territory.
  • The actual transfers peaked at 36.7% in 2018-19, but during the pandemic period of 2020-21, it reached its lowest level of 27.4%.
• Rate of growth of Central taxes:
  • The average rate of growth of Central taxes has been 13.4%, which is higher than the rate of growth of gross tax receipts at 12.5%.
• Overall transfers:
  • Overall transfers, including discretionary transfers, have generally been buoyant but have shown some moderation from the peak in the last two years.
  • Overall transfers as a percentage of gross revenue receipts of the Centre increased from 38.6% in 2013-14 to 53.8% in 2021-22, but it is expected to fall below 50% in FY23 RE and FY24 (BE).
• Non-tax transfers and discretionary funding:
  • The average growth rate of transfers has been significantly higher than the gross revenue receipts, with non-tax transfers showing particular buoyancy with an average growth of 15.7%.
  • The discretionary funding of the Centre has increased due to a decline in its committed expenditure, covering establishment expenditure, interest, statutory grants, and GST compensation to States.

Capex push:

• To accelerate the States’ investment in infrastructure and incentivise capital expenditure, the Centre launched a scheme of 50-year interest-free loans to States in 2022-23 and 2023-24.
• While most of the loan will be at the discretion of the States, a part of it will be contingent on States increasing their actual capital expenditure.
• There has been an increase in the capex of the States. As per the estimates of the Reserve Bank of India, as against the 30-year average of States’ capital outlays at 1.9 per cent of GDP, it has reached 2.7 per cent of GDP in 2021-22 (RE).
• Empirical evidence points to higher multipliers of State capex relative to that of the Centre.

Resource Flow to States:

• The States’ Share in Tax Revenues:
  • The States’ share in tax revenues has remained below the level recommended by the Finance Commissions due to the Central government’s reliance on cess and surcharges, which are non-shareable.
• Overall Flow of Resources:
  • Despite the States’ share in tax revenues being below the recommended level, the overall flow of resources from Centre to State has shown buoyancy greater than one.
  • This indicates that the flow of resources has increased at rates higher than the Central revenues.
• Central Schemes and Resource Allocation:
  • The issue of centrally sponsored schemes pre-empting State resources and affecting their allocative priorities is difficult to resolve.
  • However, transfers relative to the revenue of the Centre have not been moderated.
• Inter-State Transfers and Adverse Effects:
  • Although overall transfers have buoyancy exceeding one, inter-State transfers show that some States have been adversely affected.
  • Some States such as Tripura, Meghalaya, Nagaland, Mizoram, Sikkim (all North-Eastern States), Himachal Pradesh, Gujarat and Karnataka have received transfers below the average CAGR of 13.3% of transfers, covering both statutory and discretionary during 2012-13 to 2022-23(BE).
  • Uttar Pradesh, one of the backward States, has managed to reach the average level.

Conclusion:

• The States, as a whole, have not been short-changed in transfers from the Centre.
• While the share from the divisible pool has suffered, it has been made up through other means.
• The Centre, despite resorting to cess and surcharge to avoid these being included in mandatory tax transfers as entitlements, has been conscious of the resource needs of the States.
• However, some better-off States such as Karnataka and Gujarat and special category States of the Northeast have relatively been adversely affected in the mechanism of resource flow.

Source: The Hindu BL

Mains Question:

Q. Discuss the trends in Centre-State resource transfers and their impact on different States in India.