State-level Trends Underline India’s Growth Imperative

Context: State-level trends showcase factors impacting India’s growth.

Drivers of economic growth in states:

• Relationship with revenue growth: According to an analysis of income tax and Gross Domestic Product (GDP) of Indian states from 2012 to 2018, a 1% economic growth results in nearly 2% growth in income tax revenues.
• Ease of Doing Business (EoDB): States with a business-friendly environment that allow businesses to function without wasting their time on cumbersome regulations benefit hugely.
  • India ranks at a low indicator 121 (on the payment of taxes) in the World Bank’s EoDB rankings for 2019, resulting in poor overall 63^rd rank in 2019.

Analysis of states performance:

• Gross state domestic product (GSDP): For the country as a whole, this stood at 7.1%; after excluding the North-East, it varied from 10% in Gujarat to 5.1% in Puducherry.
• Rising Income-Tax revenues: Tax buoyancy across states is generally very high (revenue growth is on an average about twice the rate of economic growth).
  • Haryana carved out of Punjab, and Uttarakhand out of Uttar Pradesh, have recorded impressive annual income-tax growth rates of 14.77% and 15.09% (national average: 13.19%).
  • Maharashtra as the highest revenue generator: In 2017-18, largely because of Mumbai, Maharashtra raised 2.81 times the revenue of Delhi, as compared to 2.59 times in 2011-12.
  • In contrast, West Bengal (despite having Kolkata as a premier centre of business once) has slid to 7th position; its GSDP (5.3%) and revenue growth rates (11.5%) lower than the national average.
• Poor performance by Punjab: Due to poorly directed subsidies to farmers by way of free power and water strained the state’s finances and harmed agricultural land.

Way forward:

• Focus on the economic growth: which lead to generation of more revenue for the states and central government. (since the tax buoyancy on the states is already high)
• Reduced discretionary controls: will lead to healthy economic and revenue growth as states. E.g. as seen in the states of Madhya Pradesh, Telangana and Gujarat.
• Promoting voluntary compliance: and reducing punishment for the procedural lapses of ordinary taxpayers; It should not focus on negative things—penalties, prosecution, surveys to raise revenues.
• Policymaking sensitive to local conditions: since, in a land of subcontinental proportions, making policies and setting targets top-down for the country as a whole is bound to result in distortions.