How Central govt grants are buttressing the revenue receipts of Southern States

The ongoing pandemic severely impacted the revenue collection of Southern States in 2020-21. While there is considerable improvement in tax buoyancy in the first quarter of this fiscal year compared to last year, grants-in-aid from the Centre have played an important role in helping States during the pandemic. Experts, however, point out that this increasing reliance on grants from the Centre goes against the spirit of federalism.

A BusinessLine analysis of revenue collection trends of the five Southern States of Andhra Pradesh, Karnataka, Kerala, Tamil Nadu and Telangana shows that these States have performed reasonably well in the first quarter of the current fiscal year, despite the second wave of Covid impacting economic activity in April and May.

The five States play a significant role in the country’s growth. Revenue receipts of these five States stood at ₹6.53-lakh crore in FY20, accounting for 25 per cent of the total revenue receipts of ₹26.67-lakh crore.

How they fared in Q1?

The average per capita income of the five Southern States was thrice that of Uttar Pradesh and around five times that of Bihar in FY20. Their average gross state domestic product (GSDP) was more than half of the average GSDP of industrious States like Maharashtra and Gujarat.

As per provisional data put out by the Comptroller & Auditor General of India (CAG), the total revenue receipts of the five Southern States in Q1 FY22 stood at ₹1.33-lakh crore as against ₹95,488 crore in the same quarter last year.

In fact, revenue receipts in the first three months of the current fiscal is even higher than the pre-Covid level of ₹1.22-lakh crore recorded in Q1 FY20. The revenue growth in the first quarter comes despite the virulent second wave of Covid which nearly washed-out economic activities in the month of May 2021.

Of the total receipts, tax revenue of the five States collectively jumped to ₹94,751 crore in Q1 FY22 (from ₹58,721 crore in Q1 FY21) indicating pick-up in the economic activity and tax buoyancy of the States. Tax revenue constitutes over 71 per cent of the revenue receipts of the five States. Hence, its recovery is crucial for the State finances.

Within the five States, Andhra Pradesh recorded 153 per cent growth in tax receipts year-on-year at ₹7,738 crore in April 2021 against ₹3,183 crore in the April 2020. It is to be noted that CAG data for Andhra Pradesh is available only for April 2021. Andhra Pradesh was followed by Telangana and Tamil Nadu which recorded 70.06 per cent and 67.25 per cent growth, respectively, in tax revenues in the first quarter of the current fiscal against the same period in the previous fiscal. “Tax buoyancy has been seen in all States and in the Central government too. However, the main reason is the base effect. Revenue had fallen last year, and hence, an upward bias,” said Madan Sabnavis, Chief Economist at CARE Ratings. However, the combined tax revenue of the five States was a tad lower than ₹99,210 crore recorded in the pre-Covid first quarter of FY20. Non-tax revenue of the five States also rose to ₹5,903 crore in April-June 2021 quarter against ₹3,968 crore in the year-ago quarter. Here again, it was lower than ₹7,216 crore collected in Q1FY20.

Grants-in-aid

The spike in revenue receipts in the latest quarter was also driven by grant-in-aid and contributions from the Centre, which more than doubled to ₹32,488 crore in Q1FY22 from ₹15,194 crore in the first quarter of FY20.

Transfers under this head are based on the recommendation of the Finance Commission. It includes devolution of Central taxes, grants for revenue deficit, local governments, disaster management, sector-specific grants and State-specific grants. Grants outside the Finance Commission recommendations and GST compensation to States are also clubbed under this head.

For instance, revenue deficit grants are provided to compensate States for the deficits that prevail even after the devolution and the GST compensation cess. Revenue deficit grants of ₹74,340 crore in FY2020-21 was more than double the average of the previous years. For FY2021-22, the Centre further increased the revenue deficit grants to ₹1,18,452 crore based on the 15th Finance Commission recommendation.

“A spike in grants from the Centre is mainly on account of the on-going pandemic situation. In recent years, the Centre has increased its tax collection via imposition of different types of cess, which are outside the finance commission formula of how the tax revenue is to be shared with the States,” said Vidya Mahambare, Professor of Economics, Great lakes Institute of Management, Chennai. “With the pandemic, the States’ own tax revenue fell and so the Centre provided the grants,” she added.

Concerns

However, she also pointed out that high dependence on grants-in-aid from the Centre is not desirable since it indicates more centralisation of revenues with less autonomy to the States.

The issue was also mentioned in the Tamil Nadu State assembly recently. Releasing a White Paper on Tamil Nadu government’s finances, the State’s Finance Minister PTR Palanivel Thiaga Rajan said grants-in-aid increased as a percentage of revenue receipts of Tamil Nadu went up from 8.13 per cent in 2006-07 to 17.10 per cent in 2020-21, undermining the financial independence and federalism.

“The growing proportion of grants to the overall revenue receipts in the period since 2014-15 indicates a higher dependence of the State government on discretionary flows from the government of India,” he added.

Rajan also highlighted that the grants-in-aid even exceeded the share in Central taxes that Tamil Nadu received in 2019-20 and 2020-21. Grant-in-aid and contributions of Tamil Nadu jumped from ₹4,187 crore in Q1 FY20 to ₹10,718 crore in the first quarter of the current fiscal.

Tax revenue as a percentage of revenue receipts of the five States fell from 81.57 per cent in Q1 FY20 to 71.17 per cent in Q1 FY22 while the share of grants-in-aid and contributions in total revenue increased from 12.49 per cent to 24.40 per cent during the period. However, CARE Ratings’ Sabnavis said: “States are not dependent on grants as they are earmarked for specific programmes. Also, the Finance Commission has decided on transfers to States. Hence, this number is more or less fixed.”

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