These schemes alone amount to 11 per cent of revenue receipts in Karnataka and 9 per cent in Maharashtra. If continued, they will play havoc with any economic juggling or wizardry. Top this with UPS, and the states will be maimed.

Spend Till You Flop

A report by PRS Legislative Research shows that 11 of India’s states have forecast a revenue deficit, which means they need to borrow even for expenditure on heads like salaries, pension and interest payouts. These items alone comprise 52 per cent of the states’ revenue receipts for 2024-25 (budget estimates).

In the post-COVID period, the states’ own revenues have revived to levels seen in 2018-19. In 2023-24, the SGST (State GST) revenue-to-GDP ratio was higher than in 2018-19. That’s good news.

Revenues from SGST accounted for about 40 per cent of states’ own tax revenue, but the ground reality is that most states don’t receive their share of GST collections. That’s not very good news.

Relief came from the Supreme Court in July, when the authority of states to tax mineral rights was upheld. Put simply, that means states can get revenue by imposing levies on minerals. But there’s a problem here — whether it is iron ore or bauxite, coal or chromite, manganese or sand — most states are mired in controversy and allegations of rampant corruption over mining. This means that revenues are being collected and they are reaching someone... just not the exchequer.

States Of Distress

The predictable fallout of all of the above (plus other headaches, some listed below) is that a state-level financial disaster is sitting in a pot with the burner in ‘simmer’ mode. The economic pressure cooker is bound to hiss out warning toots soon. Shortly after, we could see sinkholes appear and gobble up anyone close to ground level. As is wont, that will be the common man, state government employees, small and medium enterprises and even large businesses.

All projections on revenue receipts, expenditure, deficits, liabilities and outlays announced in state budget estimates for 2024-25 point to a fracture. For one, expenditure is budgeted to be 84 per cent of total spend, while capital outlay is at 16 per cent. States project they will raise 58 per cent of revenue receipts from tax and non-tax sources, with SGST being the king, at 44 per cent of total receipts. With the king remaining elusive, his subjects are bound to suffer.

Discoms And Borrowings

There’s more. States raised 11 per cent less revenue and spent 10 per cent less than budgeted between 2015-16 and 2022-23. Average under-spending in capital outlay was 21 per cent, and losses at discoms (power distribution firms) were higher due to power purchase costs. Losses at state-owned discoms doubled year-on-year in 2022-23, on the back of higher purchase prices, driven by increased dependence on costlier imported coal. These losses are already beginning to pip investments in upgrading electricity distribution infrastructure.

Mounting deficits have seen borrowings being increased to sustain expenditure, sending total liabilities surging from 25.3 per cent of the GDP in 2018-19 to 31 per cent of the GDP in 2020-21. Since then, revenue levels have improved, but the latest figures are still below those seen in 2018-19.

A key reason for this is that while the states’ own revenues returned to levels achieved in 2018-19, central grants were lower due to the discontinuation of GST compensation grants and lower devolution. Total central transfers fell significantly, from 6.4 per cent of GDP in 2018-19 to 5.5 per cent of GDP in 2023-24. The only silver lining — state budgets of 2024-25 project an improvement in revenue receipts. The not-so-good news — these are only ‘estimates’.

On A Wing And A Prayer

Against this backdrop, the only help the states can hope for can come from landmark policy-making initiatives and far-sightedness, studded with good intent and a will to reform. In the absence of boldness, what could help are state-level economy-boosting measures, business strategies to raise money, the Finance Commission, and prayer.

The Constitution empowers the President to form a Finance Commission every five years, with the panel endorsing the distribution of tax collections between the Union and states. It also provides recommendations for giving grants-in-aid to states from the Union, as and when required. The 16th Finance Commission, chaired by Dr Arvind Panagariya, was notified by the Centre in December 2023, and will submit its report by October 31, 2025. It will contain recommendations for a five-year period, beginning April 1, 2026.

Currently, the recommendations of the 15th Finance Commission (chaired by Mr N K Singh), are in effect till March 31, 2026. This panel had suggested the states’ share in central revenues at 41 per cent of divisible taxes. If that one recommendation is persisted with and implemented, along with full sharing of the SGST share, it could catalyse a resurgence.

None other than Muhammad Ali Jinnah once said: “India is not a nation, nor a country. It is a subcontinent of nationalities.” Jinnah said this as a compliment, underscoring India’s unity in diversity and cultural richness. For India’s financially-beleaguered states, now is the time to use that unity to teeter back from the precipice and hoist the economic flag again.

(The writer is a veteran journalist and communications specialist. Views expressed are personal)