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State finances, derailed by the economic shocks of the Covid-19 pandemic, appear to be getting back on track. Thanks to an economic recovery led pick-up in own tax revenues, coupled with higher tax devolution from the Centre, aggregate revenue receipts of states show decent growth in the first three quarters of the current fiscal as compared to the pre-Covid period.
Centre’s revenues jump
The Centre itself witnessed strong growth in revenue receipts during the current fiscal, bolstered by robust income tax and corporate tax collections. According to the Controller General of Accounts (CGA), the Centre’s revenue receipts at the end of Q3 FY22 stood at ₹17.33-lakh crore, 51 per cent higher than revenue receipts of ₹11.47-lakh crore recorded during the same period in pre-Covid FY20.
The Centre’s net tax revenue grew by an impressive 63 per cent to ₹14.74-lakh crore in the first three quarters of FY22 as compared to ₹9.04-lakh crore during the same period in FY20. It has already crossed 95 per cent of the budgeted tax revenues of FY22.
Madan Sabnavis, Chief Economist, Bank of Baroda, attributed the growth to major pick up in consumption in the third quarter which includes post-harvest, post festival collections and higher corporate tax collections propelled by higher corporate profitability.
Corporate tax collection — at ₹5.2-lakh crore at the end of Q3 FY22 — was 41 per cent higher than the ₹3.69-lakh crore mopped up at the end of Q3 FY20. Income tax collections during the period also jumped over 41 per cent to ₹4.48-lakh crore (from ₹3.17-lakh crore in FY20). The Centre’s non-tax revenue, however, grew a modest 7 per cent to ₹2.59-lakh crore (from ₹2.43-lakh crore) during this period.
Moderate recovery for states
On the other hand, states — which were facing the ‘Scissors Effect’ of contracting revenues and increasing expenditure due to the pandemic — showed a modest recovery in tax collections at the end of Q3 FY22.
According to data compiled from the Comptroller and Auditor General (CAG), the top ten states (with high budgeted revenue estimates) witnessed a 16 per cent growth in state’s own tax revenue (SOTR) to ₹7.87-lakh crore at the end of Q3 FY22. The SOTR of these states stood at ₹6.79-lakh crore as of Q3 FY20.
NR Bhanumurthy, Vice Chancellor, Dr B R Ambedkar School of Economics, noted that it is only natural for state revenues to go up commensurately with the Centre since states have an equal share in GST collections and also get a share of Central taxes through the Finance Commission’s devolution mechanism.
“The own tax revenue of some states has also improved because of a growth in sales tax, stamp duties and registrations, and increased taxes on liquor sales,” he added.
Andhra Pradesh recorded a 45 per cent growth in its own tax revenues to ₹57,936 crore as of Q3 FY22 against ₹39,988 crore at the end of the third quarter of FY20. Similarly, Telangana grew by 32 per cent to ₹68,260 crore (from ₹51,812 crore in Q3 FY20) while Rajasthan, Gujarat and Bihar grew by 25, 20 and 18 per cent respectively.
Among the top ten states, Andhra Pradesh witnessed growth in all sources of its own tax revenue with land revenue and state excise duties growing by 221 per cent and 192 per cent, respectively, from pre-Covid levels.
‘Limited resource mobilisation’
However, not all states showed a higher rate of growth in tax revenues. For instance, tax revenues of Maharashtra and Tamil Nadu — the top two contributors to India’s GDP — only grew by 3 and 13 per cent, respectively.
Maharashtra recorded degrowth in four out of six own tax revenue sources during the first three quarters of the current fiscal as compared to the same period in FY20. Stamp and registration duties fell by 4 per cent, land revenue by 10 per cent, state excise duties by 1 per cent, and other taxes and duties by 35 per cent. Meanwhile, state GST and sales tax grew by 10 per cent and 16 per cent, respectively.
Sunil Kumar Sinha, Principal Economist and Director Public Finance, India Ratings & Research, said that unlike the Centre, which has both direct and indirect taxes in its kitty, states have limited sources of resource mobilisation.
“Whatever buoyancy we see in GST collections, both the Centre and state governments benefit equally because one component is state GST and the other is Central GST,” Sinha said, adding, “The centre also imposes cess on a number of items which are not sharable with state governments, and this has created a scenario where the Centre’s tax revenue growth is higher than tax revenue growth of state governments.”
Revenue expenditure of states has also gone up during the current fiscal due to a spike in pandemic-led expenditures, higher interest payments and expenditure on subsidies.
For instance, revenue expenditure of Andhra Pradesh as of December 21, 2021, (end of Q3 FY22) stood at ₹1.44-lakh crore, 41 per cent higher than revenue expenditure of ₹1.01-lakh crore during the same period in FY20. Andhra Pradesh’s pension expenditure has already reached 82 per cent of its budgeted expenditure as of Q3 FY22, while its expenditure on subsidy, at the end of the third quarter, is 104 per cent of budget estimates.
West Bengal (33 per cent), Telangana (32 per cent), Rajasthan (20 per cent) have all recorded substantially higher revenue expenditures than pre-Covid levels while Maharashtra (7 per cent), Tamil Nadu (2 per cent) and Karnataka (2 per cent) have shown tremendous control over their revenue expenditure.
‘Improving’ state finances: Ind-Ra
In a recent report, India Ratings & Research revised its outlook on the finances of Indian states to ‘improving’ for FY23 from ‘neutral’. The agency expects the aggregate fiscal deficit of states for FY23 to come in at 3.6 per cent of gross domestic product compared to 3.5 per cent (revised) for FY22. Its earlier forecast for FY22 was 4.1 per cent.
“A pick-up in own revenue collection led by economic recovery, combined with higher than budgeted tax devolution from the Centre, would moderate states’ aggregate revenue deficit to 0.73 per cent of GDP (previous estimate 1.3 per cent) in FY22,” the agency noted.
Higher devolution
According to the 15th Finance Commission, the Centre must share 41 per cent of its tax revenue with states. It has allocated ₹7.45-lakh crore devolution of central taxes to states in its revised estimates for FY22, against Budget estimate of ₹6.65-lakh crore. The budgeted devolution of central taxes for FY23 is ₹8.17-lakh crore.
States which are able to generate more own tax revenues are less dependent on devolution and grants from the Centre.
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