To strengthen the hands of state governments for financing various social welfare measures and infrastructure development schemes, the Centre has authorised the release of an additional installment of tax devolution amounting to ₹72,961.21 crore. The amount is in addition to the tax devolution due to states on 10 January, 2024 and the installment of ₹72,961.21 crore already released on 11 December, 2023 and has been released also in view of the forthcoming festivities and the New Year.
The Government gives 14 installments in a year. Two extra has been released including this one till date. However, going forward, the Government will continue the normal monthly release, making it to a total of 14. The total amount of devolution is issued every month according to the Budgeted Estimate.
The Reserve Bank of India in a ‘State Finances Report 2023-24’ sheds light on the fiscal condition of state governments for the period spanning from 2021-22 to 2023-24. The report focuses on the favourable developments, such as the decline in consolidated fiscal deficit, elimination of revenue deficit and substantial progress in capital expenditure during FY23 and FY24. The states’ consolidated gross fiscal deficit to gross domestic product (GFD-GDP) ratio declined from 4.1 per cent in 2020-21 to 2.8 per cent in 2021-22, led by a moderation in revenue expenditure, coupled with an increase in revenue collection.
The improvement in state finances achieved in 2021-22 was sustained in 2022- 23 by containing gross fiscal deficits (GFDs) within the budget estimates (BE) for the second consecutive year. As per the provisional estimates, the state’s GFD-GDP ratio at 2.8 per cent in 2022-23 was below the budget estimate of 3.2 per cent and the Centre’s limit of 4 per cent, the RBI report shows.
The debt-GDP ratio of states declined to 27.5 per cent at endMarch 2023 from the peak of 31 per cent at end-March 2021. At the individual level, however, the debt-GDP ratio for some States remains high. The overall fiscal outlook for states remains favourable in 2023-24, with adequate fiscal space for undertaking higher capex.
The states’ own tax revenue has increased from 5.7 per cent of GDP in 2003-04 to 6.9 per cent of GDP in 2022-23, tax buoyancy has improved from 2013-14 to 2022-23. The implementation of GST has been beneficial in view of increased tax buoyancy. Till 2016-17, sales tax/VAT was the largest component of own tax revenue.
From 2017-18, however, State Goods and Services Tax (SGST) has emerged as the most important source, followed by sales tax/VAT, excise duty, stamp duty and registration fees and taxes on vehicles. The RBI finds overall tax efforts of states in India to be fairly high.
Nonetheless, they need to invest in augmenting fiscal/tax capacity by undertaking tax reforms and building a strong and innovative tax administration, the report suggests. As the way forward, the RBI also calls for scaling up fiscal capacity for uninterrupted and efficient delivery of social, economic and general services to the people and for upgrading the quality of physical and human capital.