Roadmap for Answer Writing
- Introduction
- Contextualize the issue: Mention the recent protests by several states against fiscal discrimination by the Centre and the involvement of the Supreme Court.
- Set the tone for the discussion: Acknowledge the impact of central policies on state finances while emphasizing that the states themselves bear primary responsibility for their financial challenges.
- Measures by the Central Government Impacting State Finances
- Cesses and Surcharges:
- The Centre has increased the share of cesses and surcharges, thus reducing the divisible pool of taxes for states.
- Fact: In 2010-11, cesses and surcharges were 8.6% of the Centre’s gross revenue, which increased to 28% by 2021-22.
- Decline in Centrally Sponsored Schemes (CSS):
- The number of CSS has been reduced, increasing the financial burden on states.
- Fact: The Centre reduced CSS from 130 to 70 starting in April 2023.
- Restricting Borrowing by States:
- The Centre has included off-budget borrowings in the Net Borrowing Ceiling (NBC), reducing the fiscal space for states.
- Fact: Kerala challenged the new NBC in the Supreme Court, citing its adverse impact on state finances.
- Cesses and Surcharges:
- State Governments’ Role in Financial Challenges
- Power Sector Issues:
- State governments often cover the losses of state power companies, leading to increased contingent liabilities.
- Fact: Approximately 40% of loans raised by state-owned entities are guaranteed by state governments.
- Non-Merit Freebies:
- States have allocated funds for non-merit freebies, such as loan waivers and subsidies, constraining fiscal space for development.
- Fact: States like Punjab are facing a fiscal crisis due to such non-merit subsidies.
- Reintroduction of Old Pension Scheme (OPS):
- Some states have reintroduced the OPS, placing a significant long-term burden on state finances.
- Fact: States like Rajasthan, Punjab, and Himachal Pradesh have reintroduced the OPS.
- Excessive Borrowings:
- States like Tamil Nadu have relied heavily on borrowing to finance welfare schemes, leading to rising debt levels.
- Fact: Tamil Nadu has been the top borrower in India for the past four years.
- Power Sector Issues:
- Conclusion
- Balanced Perspective: Acknowledge that while the Centre’s measures have an impact, the primary responsibility for state financial management lies with the states.
- Recommendation: Emphasize the need for empowering states with better revenue-generating capabilities and ensuring timely transfers from the Centre.
- Way Forward: States must adopt more prudent financial management practices to address their fiscal challenges effectively.
Relevant Facts
- Cesses and Surcharges:
- Fact: From 8.6% of the Centre’s gross revenue in 2010-11 to 28% in 2021-22.
- Decline in CSS:
- Fact: The reduction of CSS from 130 to 70 starting April 2023.
- Restricting Borrowing by States:
- Fact: Kerala challenged the Net Borrowing Ceiling (NBC) imposed by the Centre.
- Power Sector Issues:
- Fact: 40% of loans raised by state-owned entities are guaranteed by state governments.
- Non-Merit Freebies:
- Fact: States like Punjab face a fiscal crisis due to subsidies.
- Reintroduction of OPS:
- Fact: States like Rajasthan, Chhattisgarh, and Punjab have reinstated OPS.
- Excessive Borrowings:
- Fact: Tamil Nadu has been the top borrower for four consecutive years.
Model Answer
Introduction
Recently, several states have protested against what they perceive as fiscal discrimination by the Centre, even approaching the Supreme Court of India. While the measures taken by the Central government have certainly impacted state finances, it is essential to examine the financial challenges faced by state governments and the role they play in this situation.
Central Government Measures Impacting State Finances
Increase in Cesses and Surcharges
The Central government has increased the share of cesses and surcharges, effectively reducing the amount of tax revenue available to states. For instance, the share of cesses and surcharges in the Centre’s gross revenue increased from 8.6% in 2010-11 to 28% in 2021-22, which has diminished the divisible pool for states.
Decline in Centrally Sponsored Schemes (CSS)
The reduction in Centrally Sponsored Schemes from 130 to 70 starting in April 2023 has placed additional financial burdens on states. The reduction has limited central assistance, making it harder for states to finance key projects.
Restricting Borrowing by States
The Centre has reduced the fiscal space available to states by including their off-budget borrowings in the Net Borrowing Ceiling (NBC). For example, Kerala challenged this move in the Supreme Court, arguing that it severely restricted their ability to manage state finances.
State Governments’ Role in Financial Challenges
Power Sector Issues
State governments often cover the losses of power companies with grants or guarantees against their borrowings, which increases their contingent liabilities. For example, nearly 40% of loans raised by state-owned entities are guaranteed by state governments.
Non-merit Freebies
Several states have allocated substantial funds for non-merit freebies, such as loan waivers and subsidies, which strain their fiscal capacity. States like Punjab have been identified as being on the brink of a fiscal crisis due to these subsidies.
Reintroduction of Old Pension Scheme (OPS)
Some states, including Rajasthan and Punjab, have reinstated the OPS, which places a significant future burden on state finances and limits capital expenditures.
Excessive Borrowings
States like Tamil Nadu have consistently borrowed to fund welfare schemes, leading to rising debt levels. Tamil Nadu, for example, has been the top borrower in the country for the past four years.
Conclusion
While central measures have certainly affected state finances, the states themselves also need to address their financial management issues. A balanced approach that enhances states’ revenue-generating capabilities and ensures timely transfers from the Centre is necessary for tackling the looming fiscal challenges.