Dissecting State Budget Complexities
Important insights into Indian state budgets and fiscal management.
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Capital State Budget
Expenditure Trends Analysis
State capital expenditure is slow initially but Review of 26 states' budgets shows
may increase post-Union Budget. growth, but fiscal health impact varies.
FRBM Act State Borrowing
Implications Need for management Patterns
of states' budgets and
Indian states likely to miss FY2025 fiscal Examines how states' market loans and
deficit targets under FRBM Act. finances for financial advances indicate financial trends.
sustainability
Centre's Grant Optimistic Fiscal
Disparities Projections
States face challenges due to differences States' financial estimates are often
in estimated and actual central grants. optimistic, heightening risk of non-
attainment.
State Funding: Risks & Challenges
State finances are strained by over-reliance on taxes and dwindling Central Government support.
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High Dependency on Less Central
Own Taxes Government Aid
States collecting nearly half of their States are seeing a reduction in funds from
revenue through taxes face risks if the the Central Government, which affects
economy slows. their budgets.
Unpredictable Rising State Debts
Grants
Inconsistencies in grant allocations from Increased borrowing by states can lead to
the Central Government create budgeting potential financial crises if repayment
uncertainties for states. becomes untenable.
Low Developmental
Spending
Limited investments in infrastructure and
social services hinder long-term progress
and development.
Due to GST Liquor Tax Reforms
Improving Liquor Taxes
State Tax Collection Reforms by States Property Taxes Property Tax Reforms
Vehicle Taxes Vehicle Tax Reforms
Spending vs Income Mismatch Budget for More Borrow to Cover Difference
General State Finance Trends: State Borrowing Concerns:
1. Over-reliance on own tax 1. Rising market borrowings: States are borrowing more to
collections: States get about half cover expenses. Gross borrowing is projected at ₹10.5-11
their revenue directly from taxes trillion this year.
they collect themselves.
2. Central Government shares taxes 2. Unexpected debt surge: In March 2024 alone, state debt
and gives grants: This accounts for issuance was surprisingly high at ₹1.9 trillion.
about 40-45% of state income.
3. Tax buoyancy is improving: States Challenges and Fiscal Management Issues:
are earning more tax per rupee of 1. Unpredictable Central grants: Money from Centrally Sponsored Schemes and other grants
economic activity (GDP), especially can be much less than states budgeted for.
2. Inefficient tax systems: Stamp duty rates are too high (5-8% vs. international average
from GST.
<5%), leading to tax evasion.
3. Revenue shortfalls from cess and surcharge: Although states need this income, these
taxes go entirely to the Central government and have grown to 17.7% of its gross tax
revenue.
FACTS 4.Vertical Imbalance: States collect only 37% of total taxes in India, but are responsible for
64% of spending, especially on health, education, etc.
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Strategies for State Fiscal Health
Sustainable finance for states involves diverse income sources
and smart spending.
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Heed Expert Advice
Diversify Revenue Adopting Finance Empower Local
Streams Commission Governance
States should balance recommendations Decentralizing power
their income portfolio ensures informed leads to more localized
to avoid over-reliance fiscal policies and tax collection and
on a single revenue equitable resource decision-making,
source. distribution. improving financial
management.
Boost Private Optimize Subsidy
Investment Distribution
Encouraging private Targeting subsidies
sector investment can effectively reduces
enhance job creation wasteful expenditure
and increase taxable and directs funds to
earnings. those who need them
most.
Inefficient tax Is the Yes Improve the Property tax collection
collection system system enhanced End of tax collection
messy? issue
No
Yes Compliance
Simplify tax rules improves
Is it
confusing
Too many different tax End of confusion
?
rules
No
Issues in
present Dialogue for Revenue sharing
collection Yes agreement improved
mechanisms
Is there
Central vs State tension? End of tension
government
No
Discuss revenue 'Cess' distribution
Yes sharing fair
Do states
'Cess' tax want a End of 'cess'
issue share? No issue
