Between stock and states

Despite impressive growth in tax revenue-driven by GST, online business transactions, and robust direct tax collections-the financial dynamics between the central and state governments seem strained. According to a recent report by NSE, grants-in-aid from the Centre to states are expected to decline by 6.3% in FY25, marking a sharp reversal from the 13.9% growth seen in FY24. This projected dip is likely to place considerable fiscal pressure on many states, especially those heavily reliant on central support. Yet, despite healthy tax collections, states are now receiving less financial assistance from the Centre through grants, underscoring a financial disconnect between growing revenues and shrinking intergovernmental transfers. This reduction in grants will disproportionately affect states in eastern and northeastern India, where central support constitutes a significant share of revenue. States such as Meghalaya, Mizoram, Nagaland, Manipur, Tripura, Sikkim, Arunachal Pradesh, Himachal Pradesh, and Assam will feel the pinch the most, as grants-in-aid account for 25% to 40% of their total revenue receipts. Without adequate central support, these states may struggle to maintain public services and invest in development projects.India’s tax revenue has grown steadily, with collections reaching Rs.4.81 lakh crore by August 2024, compared to Rs.3.91 lakh crore in the same period in 2023. Personal income tax revenues have surged, and the direct tax-to-GDP ratio hit a two-decade high of 6.64%, reflecting the government’s ability to capitalize on economic growth. Additionally, direct taxes contributed 56.72% of total tax revenue in FY24-its highest share in 14 years. The Goods and Services Tax (GST) framework, which ensures revenue sharing between the Centre and states, has been a vital source of funds. GST revenue is generally split 50:50 between Central GST (CGST) and State GST (SGST). The central government’s receipts come from taxes (income tax, GST, and customs duties), non-tax revenues (like dividends from public sector utilities), and capital receipts through disinvestment. However, 60% of total government revenue is collected by the Centre, while state governments bear the larger burden of public expenditure, accounting for about 60% of national spending. With grants shrinking, states will need to explore alternative revenue sources or improve the efficiency of spending to avoid budgetary stress. The mismatch between rising national revenues and decreasing state-level support raises concerns about fiscal federalism. While the Centre benefits from economic growth, states may be forced to introduce new taxes, cut spending, or seek loans to bridge their budget gaps. Businesses and entrepreneurs operating in the affected regions should stay alert to any new policy measures as states try to balance their books. What should also be of concern is that the latest data from the Centre for Monitoring Indian Economy (CMIE), an independent think tank, showed that the unemployment rate in India stood at 7.8 percent in September 2024, a decline from 8.5 percent in August 2024. However, the data leave much to be desired as India is still experiencing the impact of high prices, inflation and post-covid pandemic. Going forward, both the Centre and states must reassess revenue-sharing mechanisms to ensure balanced economic development. Without coordinated financial planning, India risks uneven growth, with some states struggling to keep pace with national economic momentum. Whatever be the basis for the government’s claim that India is the world’s fastest growing economy and that by 2027-28, it would become a $5 trillion dollar economy appears to be a tall order at least as of today.