Tax revenues at the disposal of states were higher than the Centre’s by an unprecedented 4% of the gross domestic product (GDP) or R 5.79 lakh crore in FY16, thanks mainly to a steep 10 percentage points increase in transfers from the latter’s divisible pool after the 14th Finance Commission award.
Put differently, the states’ share in central taxes increased a huge one percentage of GDP to 3.75% between FY15 and FY16.
While the figures, put out by the Union finance ministry on Thursday, were based on the initial budget estimates (BE), the actual data must not have changed the situation significantly — in case of the Centre, the net tax revenue was revised only marginally from the BE of R9.2 lakh crore to R9.4 lakh crore; on their part, the states have upped VAT rates in recent years and are seen to have achieved, in the aggregate, the budgeted own tax revenue growth.
The states’ tax revenue include their own revenue and funds devolved to them by the Centre, with the latter now as high as 55% of the former, as compared to 46% in FY11 that saw implementation of 13th Finance Commission’s recommendations.
The public finance statistics also revealed how the Centre bore the bulk of fiscal stimulus burden that followed the global financial meltdown in FY09. While the Centre’s net tax revenue saw a huge drop from 8.8% of GDP in FY08 to 7.9% in FY09 and further to 7% in FY10, the states’ tax funds declined only moderately from 8.6% of GDP in FY08 to 8.4% in FY10.
Consequently, the Centre’s fiscal deficit which was contained at a benign 2.5% of GDP in FY08 expanded dramatically to about 6% in the following year and remained at almost the same level even two years later as the consumption stimulus was yet to be wound down.
The fiscal deficit of states, however, was reined in at 2% GDP in FY11 itself, after the slippage to 3% in FY10. The combined fiscal deficit of the Centre and states was pegged at 6.2% of GDP in FY16. The Centre had achieved its target of 3.9% of GDP for the FY16, but analysts reckon that the states’ deficit might have been more than the budgeted 2.4% of GDP, although within the 3% limit.
A committee headed by NK Singh is reviewing the Fiscal Responsibility and Budget Management (FRBM) Act 2003 and evaluating the option of replacing absolute fiscal deficit targets with a range that is in sync with credit trends. Also, states have now been given some flexibility in their fiscal balancing to be able to take over the debts of ailing state electricity boards (discoms).