The Financial Capacity of States is being Weakened

Context: Shrinking devolution,  divisible pool, Central grants and shortfall in Goods and Services Tax (GST) compensation has led to a substantial reduction in the States revenues (by 20-25%). 

Causes of Weakened Financial Capacity of States  

• Declining devolution: Actual devolution is less than the Finance Commission’s projection; (14% less in 2014-15 and 37% in 2019-20).
• Increased cess and surcharge: Cesses and surcharges soared from 9.3% to 15% (Between 2014-15 and 2019-20) of gross tax revenue of Centre. (Note: they are not shared with the States).
• GST shortfall: Of the nearly Rs 3 lakh crore GST shortfall to the States, the Centre will only compensate Rs 1.8 lakh crore.
• Decline in Central grants: Central grants are also likely to drop signi?cantly this year. For instance, actual grants to Karnataka is expected to decline from Rs 31,570 crores to Rs 17,372 crores.

Impact of Reduction in Central Grants to States

• Adverse impact on livelihoods, welfare and security: due to constrained welfare and development responsibilities of States.
• States forced to resort to colossal borrowings: Since Centre absolved itself of its responsibility (to borrow for states), thus the repayment burden will overwhelm State budgets for several years.

• States unable to realize economic growth potential: due to adverse consequences felt in per capita income, human resource development and poverty.

Conclusion: The systematic weakening of States serves neither federalism nor national interests and is a negative-sum game.