Fiscal position of most states is in dire situation


By Dr. Gyan Pathak

It was as crystal clear even during the pre-budget consultations of the Union Ministry of Finance for the fiscal 2023-24 on November 25 that the fiscal positions of most of the states were in dire straits and now, when the budget exercise has begun in right earnest, Modi government is finding the issue trickier than it was presumed to be.
During the pre-budget consultations the states finance ministers had demanded more funds from the Union Finance Minister Nirmala Sitharaman along with greater say in implementing centrally-sponsored schemes and an increased royalty on minerals.
Had it not been the last full budget for the Modi government before the general election 2024 in the country, it would have simply ignored the demands as it has been doing for the last four budgets during their second term since 2019. The demands are old but the political situation demands a more careful handling.
It is no secret that the Modi government has been in favour of a ‘strong centre’ which talks about ‘one nation and one …everything’. They have even made such policies and implemented them in a manner that erodes the ‘federal structure’ of the country. The situation had found voice in the Tamil Nadu’s Minister of Finance Palanivel Thiagarajan who said during the pre-budget consultations that states, cutting across party lines, that centrally sponsored schemes are constraining the states’ fiscal autonomy since in some schemes states end up contributing large amounts which are more than the Centre’s contribution.
The Modi government has always tried to financially weaken the states by not providing eno ugh funds to them and has prevented them from raising taxes through implementing GST. Several states have demanded justice because they feel that the Modi government is not giving them their justified share in the tax revenue.
All these have political implications in the pre-election year. If the states are financially crippled they cannot perform well, especially the opposition ruled states, against which Modi led BJP can successfully campaign. However, if the opposition ruling establishments are able to successfully convince the people that they have been victimised by the Centre, the BJP will have to pay the price. Thus, there is every risk of creating a double-edged political sword that can potentially benefit and also harm the BJP, making the issue of the ‘amount of funding’ the states will receive, trickier.
Centrally sponsored schemes have always been seen as a political tool of the Centre through which the Centre plays politics right up to the Panchayat level. It should be noted that after implementation of three-tier system of governance in India – Panchayati Raj, States, and the Centre are constitutionally required not to interfere with each other’s affairs. However, this has remained in the statute book only, not on the ground. Centre devises schemes from the top and implements it up to the Panchayat level only for doing politics while ignoring the rights of the local bodies and also the states. Centre does not even give weightage to the say of the States and the Panchayats.
It is in this backdrop, that the states across party lines had demanded during the pre-budget consultations that they should be given greater flexibility in implementing centrally sponsored schemes. Bihar’s Minister of Finance has even said that centrally sponsored schemes should be limited as the burden on states for such schemes are increasing, while states are fund starved.
Royalty for minerals are a major source of income for the country, but states have always been demanding for more royalty since minerals are mined from their lands but they are getting a pittance from that in the form of royalty. The Centre and the private companies are benefitting the most, while they remain fund starved. The Union Ministry of Finance is finding the demand too difficult to accept now, since several mineral rich states are opposition-ruled which may become politically stronger with increased royalty.
However, the social sector is becoming victim to the Modi government’s strategy of keeping the states fund-starved. People have started cursing the Modi government more than the state governments for failure in helping them overcome the present day tribulations of price rise, inflation, joblessness, lack of social security and access to health services, medicine, diet, and even education for their children.
It is therefore imperative for the Modi government to keep people happy during the pre-election year as well as weakening the opposition ruling establishments in the states through restricted flow of funds from the Centre. Since the states’ fiscal deficits and revenue position are already in very bad shape, the flow of funds is demanding ever more careful considerations by the officials involved in budget making.
Gross fiscal deficit of the states for 2021-22 was Rs 8,18,584 crore as against Rs 9,31,652 crore in the revised estimate for 2020-21. Actual gross fiscal deficit of states in 2019-20 was Rs 5,24,710 crore.
As for the gross revenue deficit, it was Rs 1,21,495 crore in actual in 2019-20, which rose to Rs 3,95,149 crore in 2020-21. It was budgeted for Rs 1,17,779 crore for 2021-22, and there are indications that it is going to rise with the revised estimate. Gross primary deficit in 2019-20 was Rs 1,73,322 crore which grew to Rs 5,38,301 crore in 2020-21. Budget estimates for primary deficit in 2021-22 was Rs 3,80,015 crore which is most likely to increase.
States own tax revenue in 2019-20 was Rs 12,23,993 crore which almost remained stagnant in 2020-21 at Rs 12,41,117 crore. The budget estimate for 2021-22 was Rs 15,94,665 which is not likely to be met due to slow economic recovery.
Gross non-tax revenue for states was Rs 2,60,891 crore in 2019-20 which declined to Rs 2,11,453 crore in 2020-21. Budget estimate for 2021-22 was Rs 2,86,742 which is not likely to be met on account of sluggish economic conditions.
State’s interest liabilities are also very high. It is growing rapidly from Rs 3,51,389 crore in 2019-20 to Rs 3,93,351 crore in 2020-21 and Rs 4,38,569 crore in 2021-22.
Union Finance ministry has to tread very carefully in dealing with the state finances, since it has become a politically sensitive issue for the pre-general election year. (IPA Service)