Beyond the Pandemic: The Crisis of Revenues

Context: The Covid-19 pandemic has cost us dear in not only lives and livelihoods but also lower revenues and higher expenditure, both for the Union and the states.

Constitutional distribution of funds and functions between states and union government:

• Receipts: includes important taxes, such as on income and imports that have been assigned to the Union, and those on property or sale of liquor to the states.
• Expenditure side:  defence and external relations have been assigned to the Union, and those on primary education, health and law and order to the states.

Challenges with general (Union and states) government’s finances:

• Insufficiency of revenues: India’s general government tax revenue as a proportion of Gross Domestic Product (GDP) at 17% in 2017. (all percentages are as a proportion of GDP henceforth)
  • This was lower than all other G-20 countries, except Indonesia, and the lowest among the BRICS (Brazil, Russia, India, China and South Africa).
• Rising Vertical gap in Union and states revenues: due to the state's revenue falling short.
  • For Indian states, it was 58% in 2017-18, compared to the OECD average of 40%.
  • This vertical gap has increased in 6 years (2011-2017) due to:
    • Decline in states tax (from 6.4% in 2011-12 to 6% in 2017-18) and non-tax (from 1.1% to 1%) revenues.
    • Rising revenue and capital expenditure of states (between 2011-12 and 2017-18): increasing from 12.3% to 13.5%, and from 2.4% to 2.5%, respectively.
• Stressed finances of union government even in pre-pandemic period (between 2011-12 to 2017-18):
  • While the tax revenues before devolving the states’ share under Finance Commission awards increased from 10.2% to 11.2%, while non-tax revenue declined from 1.4% to 1.1%.
  • Union government was in deficit (0.2%) in 2017-18, even before devolution to states.

Conclusion: Once the pandemic is over, the states need to garner more own revenues to spend more on meritorious heads such as education, health and infrastructure.