Centre-State resource transfers have been a subject of considerable debate. It has been argued that there has been a certain encroachment by the Centre into the domain of the States. However, the data suggest that transfers to the States have by and large has been fair. That said, there are cases of some States not getting their due.

Therefore, it would be a stretch to argue that the States as a whole have been short-changed in transfers from the Centre. While the share from the divisible pool has suffered, it has been made up through other means.

Unpacking the trends

A snapshot of fiscal cooperation is given in figure 1. Overall share of the States in Central taxes has fallen short of Finance Commission’s recommendation during the 13th, 14th and 15th Finance Commission award periods. The Fourteenth Finance Commission had recommended 42 per cent of the net taxes to be transferred to the States; this share was reduced to 41 per cent by the Fifteenth Finance Commission only because Jammu & Kashmir became a Union Territory and was outside the allocations.

The actual transfers peaked at 36.7 per cent (but below the mandated 42 per cent) in 2018-19 and moderated to its lowest level of 27.4 per cent during the pandemic period of 2020-21. Average rate of growth of Central taxes at 13.4 per cent, however, exceeded the rate of growth of gross tax receipts at 12.5 per cent.

However, overall transfers including the discretionary transfers have generally been buoyant, showing some moderation from the peak in last two years. But these are Revised and Budget Estimates and they undergo changes. Overall transfers as a percentage of gross revenue receipts of the Centre increased from 38.6 per cent in 2013-14 to 53.8 per cent in 2021-22; it is expected to fall below 50 per cent in FY23 RE and FY24 (BE).

The average growth rate of transfers at 14.3 per cent has been significantly higher than the gross revenue receipts of 12.1 per cent. Non-tax transfers have been particularly buoyant with an average growth of 15.7 per cent. The discretionary funding of the Centre has increased because of a decline in its committed expenditure, covering establishment expenditure, interest, statutory grants and GST compensation to States.

Capex push

To accelerate the States’ investment in infrastructure and incentivise capital expenditure, the Centre launched a scheme of 50-year interest-free loan to States in 2022-23 and 2023-24. While most of the loan will be at the discretion of the States, a part of it will be contingent on States increasing their actual capital expenditure.

There has been an increase in capex of the States. Per the estimates of Reserve Bank of India, as against the 30-year average of States’ capital outlays at 1.9 per cent of GDP, it has reached 2.7 per cent of GDP in 2021-22 (RE). Empirical evidence points to higher multipliers of State capex relative to that of the Centre.

While the States’ share in tax revenues has remained below the level as recommended by the Finance Commissions over time due to the Central government’s reliance on cess and surcharges, which are non-shareable, overall flow of resources from Centre to States has had a buoyancy of greater than one, indicating that these have increased at rates higher than the Central revenues.

While the issue that the centrally sponsored schemes pre-empt State resources and affect their allocative priorities is difficult to be resolved, the transfers relative to the revenue of the Centre have not moderated.

Despite overall transfers having buoyancy exceeding one, inter-State transfers do indicate that some States were affected adversely. As against the average CAGR of 13.3 per cent of transfers, covering both statutory and discretionary during 2012-13 to 2022-23(BE), overall transfers were way below this mark for Tripura, Meghalaya, Nagaland, Mizoram, Sikkim (all North-Eastern States), Himachal Pradesh, Gujarat and Karnataka. Uttar Pradesh, one of the backward States, managed to reach the average level.

The takeaway is simple. The Centre, despite resorting to cess and surcharge to avoid these being included in mandatory tax transfers as entitlements, has nonetheless, been conscious of resource needs of the States.

Better off States such as Karnataka and Gujarat and special category States of North-East have relatively been adversely affected in the mechanism of resource flow.

Gopalan is a former Finance Secretary, and Singhi is a former Senior Economic Adviser, Ministry of Finance