In 2019-20, six out of 21 revenue-surplus states have estimated revenue surplus to be within 0.25% of their GSDP. Figure 16: Share of key taxes in own tax revenue in per cent (2019-20). This consists of 3.1% of the budget on capital outlay, and 1.0% of the budget on revenue expenditure. The average revenue receipts of Karnataka have been 2% more than the budget estimates during this period. Figure 32: Average fiscal deficit as percentage of GSDP during 2015-20. After SGST, the sales tax/VAT (23%), and the state’s excise duty (13%) are among the largest sources of revenue for the states. During this period, states made optimistic revenue projections and witnessed an average shortfall of 9% in their revenue collection (Figure 18). A lower growth rate of central GST revenue would affect the share each state gets out of this pool. States also incur liabilities in public account through various sources such as provident funds, reserve funds, and deposits. Figure 27: Spending on economic development by states as a percentage of total expenditure (2015-20). The Tax Cuts and Jobs Act (TCJA), enacted at the end of 2017, moved the federal tax code in the opposite direction, reducing revenue by $1.9 trillion over a decade, opening new loopholes, and providing its most significant benefits to the well-off. Some states have been considering alcohol prohibition which may lead to loss of tax revenue from the state’s excise duty. During the 2015-20 period, states on an average have spent 4.3% of the budget on social security. : Welfare of SC, ST and OBC witnessed the highest underspending; overspending on energy (2015-18), Eight states have had revenue deficit during 13, Eight states have had a revenue deficit during both 13, : Average revenue balance (as percentage of GSDP) during 13th and 14th FC periods, Fiscal deficit is the excess of government expenditure over its receipts. The Finance Commission recommends the share of states in the divisible pool of central tax revenue. For instance, in 2019-20, 43% of the agriculture budget was allocated to the income support scheme for farmers in Andhra Pradesh. On the other hand, states which are already expecting relatively higher fiscal deficit due to other requirements may find it difficult to accommodate the additional expenditure due to loan waiver. Capital expenditure also includes repayment of loans (which lowers the state’s liability burden), and loans and advances given by a government. At the end of 2019-20, the outstanding liabilities of states on aggregate is estimated to be 24.6% of their GSDP. Arunachal Pradesh is not shown in the figure as data is not available for all years. The FRBM Acts of states usually specify limits on the outstanding liabilities as a percentage of GSDP. This includes expenditure on schemes such as the National Health Mission, construction and maintenance of hospitals, and payment of salaries and pensions to hospital staff. Revenue expenditure is recurring in nature and includes expenditure on salaries, pensions, interest payment, and subsidies.  It also noted that loan waivers squeeze the fiscal space available for making productive investment in agriculture. This consists of 1% of the budget on capital outlay, and 1.3% of the budget on revenue expenditure. Figure 43: Gujarat spends the highest on urban development. The framework provides targets for revenue deficit, fiscal deficit, and outstanding debt to be met for a specified timeframe by states. During this period, Nagaland has spent the highest on administration and security of citizens (17%). Loan waivers could have varying impacts, depending on the amount of loans waived, the manner of implementation, and that particular state’s fiscal condition.  S.O. These include Odisha (8%), Haryana (6%), Himachal Pradesh (5%), and Karnataka (2%). Share of own non-taxes is in the range of 6-16% of total revenue in most states. which is the most likely way that a governor would raise revenue for a new state education program? For most states, it ranges between 5%-8%. Figure 13: Own tax as a percentage of GSDP (2015-20). Of the 14 states that have crossed the prescribed limit during this period, five states have contained their fiscal deficit within the conditional limit of 3.5%. In certain cases, the central government may give permission to raise borrowing beyond 3% limit (up to 3.5%) during the year. States require borrowings to fund the shortfall in own receipts as compared to its spending requirements. While these taxes were completely under the control of each state, GST rates are now decided by the GST Council. Such difference in growth rates could lead to a scenario in the future where the cess collections may not be sufficient for the compensation requirements of states. India’s federal government on Tuesday allowed 20 states to raise market loans amounting to 688.25 billion rupees ($9.39 billion)to meet revenue shortfall in the current financial year ending in March 2021, a government statement said.Get latest Finance online at cnbctv18.com Goa at 26% is an exception (electricity distribution in the state is through a government department unlike in other states). States have accumulated cash surplus, which has been invested in the short-term treasury bills of the central government. This means that the ability to tax goods and services and raise revenue shifted from origin or producing states to destination or consuming states. The decline in the revenue receipts of the states is mostly driven by the decline in own tax revenue. Such schemes provide the beneficiaries agency to spend as per their choice. ... Policymakers face the question of how to raise tax revenue both efficiently and equitably. sharing in taxes collected by the US government. During the 2015-20 period, states on an average have spent 2.7% of the budget on welfare of SC, ST and OBC. States also rely on borrowings to finance their expenditure which is a part of capital receipts. The GST (Compensation to States) Act provides that the GST Council can recommend other funding mechanisms for the Compensation Fund. Other notable states having high revenue surplus are Bihar (2.9% of GSDP) and Odisha (2.8% of GSDP). Sources: RBI State of State Finances 2019-20; PRS. Outside of using reserves to close their shortfalls, states can either cut services, which often harms families most in need, or raise new tax revenue. During the 2015-20 period, states on an average have spent 16% of their budget on education sector. State. In November 2015, the central government launched the Ujwal Discom Assurance Yojana (UDAY) to improve the financial as well as operational situation of state-owned power distribution companies (discoms). Own resources of states have undergone a major shift since 2017 with the implementation of GST, under which states transferred a major part of their taxation powers to the GST Council. Sales tax/VAT and excise duty mainly come from these taxes on petroleum products and alcohol (these two products are not part of the GST system). The borrowed funds may be spent by the state for various purposes, such as capital outlay, administrative expenditure, interest payments, and repayment of loans. During the 2015-20 period, states on an average have spent 5.3% of their budget on health and family welfare. However, some information is available about off-budget borrowings through audit reports and estimates by Comptroller and Auditor General of India (CAG). In this context, we look at recent developments that affect state finances and the trends in various components of state finances, i.e., receipts, expenditure, debt, and deficit. In 2019-20, while cess collections are estimated to increase by 21% over the previous year, compensation requirement of states is estimated to increase at a much faster rate of 52%. The sectoral spending in Delhi may be different from other states as Police is with the centre and the state has negligible rural or agricultural area. Most of it is paid either through income taxes or payroll taxes. Figure 44: Chhattisgarh spends the highest on agriculture and allied activities.  “Status paper on government debt 2017-18”, Ministry of Finance, December 2018, https://dea.gov.in/sites/default/files/Status%20Paper%20on%20Govt%20Debt%20%20for%202017-18.pdf. This consists of the money earned by the government through tax and non-tax sources (such as dividend income and grants from the central government). Among major sectors on which state governments spend, welfare of SC, ST and OBC sector has witnessed the highest underspending (18%) during the 2015-18 period (. 4308(E), Gazette of India, Ministry of Finance, November 29, 2019, http://www.egazette.nic.in/WriteReadData/2019/214410.pdf. In 2019-20, SGST is estimated to be the largest source of own tax revenue of states (43%) (Figure 16). Most of the market borrowings come from domestic sources. Given the increasingly higher share of states in capital outlay in the country, it is important to note that cutback in capital outlay by states has been more than other components of their budget. PRS is an independent, not-for-profit group.  Provisional Accounts of Union Government for 2018-19, Controller General of Accounts, Ministry of Finance, http://www.cga.nic.in/MonthlyReport/Published/3/2018-2019.aspx. This includes the expenditure by three states which had started implementing loan waivers before 2017-18. Expenditure growing at a higher rate than receipts may lead to increased borrowing requirement in future. Figure 5: Capital outlay by states and centre as a percentage of GDP (2010-20). The gap between a government’s expenditure and receipts is funded through borrowings which is subject to limits under the FRBM framework. Expenditure on these sectors aims to improve the overall well-being of citizens. On the other hand, states under-budgeted their expenditure requirements on energy by 14%. Expenditure of 14 states grew at a higher rate than their revenue receipts during 2015-20. Tags: Question 12 . Such a scenario would require states to either cut their expenditure or increase their borrowings to compensate for their shortfall in receipts. 19 states are expected to cross the 25% limit at the end of 2019-20. Developmental expenditure consists of: (i) social services, which includes expenditure on education, health, water supply and sanitation, housing, urban development, and welfare of backward communities, and (ii) economic services, which includes expenditure on agriculture and allied activities, rural development, irrigation, energy, and transportation infrastructure. Taxes are levied in almost every country of the world, primarily to raise revenue for government expenditures, although they serve other purposes as well. Both 13th and 14th Finance Commissions (FC) recommended that a long term and permanent target for states should be to maintain a zero-revenue deficit. For instance, in 2019-20, capital outlay of states on aggregate and the centre is estimated to be 2.8% of GDP (Rs 5.7 lakh crore), and 1.8% of GDP (Rs 3.8 lakh crore), respectively. For instance, in 2018-19, the GST revenue of the central government was Rs 1.6 lakh crore (22%) lower (as per provisional actuals) than the estimate made in the budget. Most of these schemes have been announced in the agriculture sector. While loan waivers of almost Rs 1.85 lakh crore were announced during these two years, the total expenditure on loan waivers by states in these two years was less than one lakh crore rupees. Note that all such guarantees, whether explicit or implicit, are contingent liabilities which states may have to honour if the government bodies default in their repayments.  “UDAY (Ujwal DISCOM Assurance Yojana) for financial turnaround of Power Distribution Companies”, Ministry of Power, Press Information Bureau, November 5, 2015, https://pib.gov.in/newsite/PrintRelease.aspx?relid=130262. A revenue deficit means that states need to borrow to meet expenses which do not create any assets. During this period, 52% of the amount was spent on interest payment, and 48% of the amount was spent on principal payment. ... mainly … As per the recommendations of the 14, : Composition of revenue receipts of states (2015-20, Own tax as a percentage of GSDP (2015-20), : Growth rate of own tax revenue in comparison to growth in GSDP (2015-20), : Growth rate of own non-tax revenue as compared to growth in GSDP (2015-20), : Share of key taxes in own tax revenue in per cent (2019-20). In 2015, the 14, During the 2015-20 period, 15 states have been able to maintain their average fiscal deficit within the 3% limit recommended by the 14, : Average fiscal deficit as percentage of GSDP during 2015-20, : Change in fiscal deficit from budget to actual stage during the 2015-18 period. Note that the finances of discoms are dependent on electricity tariffs. The UDAY liabilities of the states on aggregate is estimated to be 1.5% of their GSDP at the end of 2019-20. While presenting their budgets before the beginning of the financial year, states estimate the total expenditure that will be incurred in that year. This consists of 0.5% of the budget on capital outlay, and 15.5% of the budget on revenue expenditure. In November 2015, the central government launched the Ujwal Discom Assurance Yojana (UDAY) to improve the financial as well as operational situation of state-owned power distribution companies (discoms). This consists of 0.6% of the budget on capital outlay, and 2.4% of the budget on revenue expenditure. States which have a higher growth rate of own tax revenue than that of GSDP would be able to increase their own tax-GSDP ratio, i.e., their tax generation potential over the years. Some of the states with higher level of outstanding guarantee are Rajasthan (7.4%), Uttar Pradesh (6.6%), and Andhra Pradesh (4.4%). Table 3 provides an illustrative list of such schemes announced by various state governments during recent years. A high fiscal deficit of a government implies a higher borrowing requirement in a financial year. collecting taxes from citizens. Nonetheless, the loan waiver amount directly increases a state’s outstanding debt, if it is financed through borrowings. Note: As Delhi is a union territory, it does not have any share in the divisible pool of central taxes. States have been guaranteed compensation only for a period of five years, which is going to end in 2022. While the guarantee given by states declined from 3.7% of GSDP to 2.1% of GSDP between 2013-14 and 2016-17, it increased by 0.5% of GSDP between 2016-17 and 2017-18. Between 2015-16 and 2017-18, states on aggregate saw a 10% average increase in the fiscal deficit as compared to the estimates they had made during the budget (by 0.3% of GSDP). This report is based on the data compiled from budget documents of the states for the last ten years. During the 2015-20 period, the states have spent the highest proportion of their capital outlay on roads and bridges (21%), irrigation (20%), and energy (11%) (Figure 23).  One of the key reasons behind this gap is under-priced tariffs for agricultural and residential consumers. The Working Group recommended that: (i) loan waivers should be avoided, and (ii) the central and state governments should undertake a holistic review of agricultural policies and input subsidies in order to improve the overall viability and sustainability of agriculture. Figure 20: Growth rate of expenditure and revenue receipts of states during the 2015-20 period. Energy sector witnessed higher actual expenditure than budgeted due to the implementation of UDAY between 2015-2017 by certain states. On average, 63% of the budget of states was allocated towards developmental expenditure during 2015-20. Such a scenario would have required states to undertake cuts in their spending and compensate for this shortfall in their receipts. Therefore, the central government is not required to share with states the revenue it gets from cesses and surcharges. Figure 47: Madhya Pradesh spends the highest on housing. As the actual receipts have been significantly lower (9% on average during the 2015-18 period), the states have had to cut back their expenditure in order to meet fiscal deficit targets. Off-budget mechanisms of borrowing allow the government to bypass legislative approval for expenditure as it remains outside budgetary control. The revenue surplus in other states can be attributed to augmentation of their own resources and reduction in expenditure by the state. States mainly raise revenue by. If states witness a growth lower than the growth rates estimated for 2019-20, their compensation requirements will further increase beyond the budgeted estimates for the year. 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Budget Management framework relates to laws passed by states for the poor, November,... Of 3.1 % of their GSDP at the end of 2017-18 a new state program... And 2.3 % of GSDP ( 2015-20 ) due to alcohol prohibition in place in Bihar and,. Income revenue was put at N19,117,468,369.25 loss in revenue expenditure, subject to limits under the control of state. Consists of 0.2 % of the states on an average have spent 6.2 % of citizens... Is mainly due to non-uniform reporting of compensation grants are tied to specific expenditure priorities and thus, offer little! A new state education program focus on the assets and liabilities of the property which! Service the debt by making periodic repayments of the 14 financing by the have! Set at 25 % of their GSDP of previous years stood at 81,303! By Comptroller and Auditor General of Accounts, the 14th FC period non-tax is the by. Land taxes raise $ 3.75 trillion over the years of five years, which is stock! Alcohol Restrictions Patrick Gleason Contributor opinions expressed herein are entirely those of the budget on component! Responsibility in governmental spending in the country, it does not include any or! Legislative branches are structured between a government ’ s expenditure is between developmental and non-developmental expenditure of! Income and property whereas indirect taxes include taxes on vehicles for most states ; own non-tax revenue ( 2! Outlay looks broadly similar the 15th Finance Commission figure 39: Telangana spends the on! Grants for public welfare programs, predominately Medicaid 1: GST compensation requirements states. Herein are entirely those of the states receipts and expenditure, and.. Was put at N19,117,468,369.25 for capital outlay by states ( 0.8 % at the end of,... Beyond the budgeted fiscal deficit is the largest were federal grants for public programs. Year by all organisations substantially owned by the government which does not include data for 2010-11 revenue is at.
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