Total resource transfers to states by the Centre are estimated to be flat in the current financial year even though the Centre’s budget will expand by over 10%, reflecting lower growth in tax devolution and reduction in outlay for Finance Commission grants and capex loans to states.
In the revised estimate (RE) for FY23, the centre projected its net tax revenue (post-devolution) will grow by 15.6% on the year to Rs 20.87 trillion. However, the devolution to states is projected to grow by 5.6% on year only to Rs 9.48 trillion in FY23RE, largely due to cess and surcharge receipts that are not directly shared with states.
Cess and surcharge are estimated to be about 17% of the centre’s gross tax revenue in FY23 compared with around 11% in FY18, reflecting an increased reliance on cess and surcharges to spend on schemes. Of course, the Centre spends part of these proceeds for various central sector schemes which benefit states.
The Centre’s budget expenditure is estimated to rise 10.4% on year to Rs 41.87 trillion in FY23RE. However, total transfers to states are projected to rise by just 0.3% on year to Rs 17.1 trillion in FY23RE.
The stagnation could be largely attributed to the annual decline in outlays for Finance Commission grants to local bodies, health and centrally sponsored schemes.
The major reduction happened in the outlay under Finance Commission grants for urban and rural bodies which would get Rs 1.73 trillion in the current financial year, down 16.4% on the year. Sources said the reduction in outlay for municipalities and rural bodies was on account of non-compliance with conditions such as regular civic body elections and presentation of the balance sheet as per accrual accounting, among others.
The outlay on centrally sponsored schemes is estimated to be at Rs 4.51 trillion in FY23 or 0.6% lower than actuals of FY22, due to lower allocation in many schemes including PM Awas Yojana and irrigation.
Surprisingly, the grants to states for the health sector have declined by 27% on year to Rs 8,895 crore in FY23RE from Rs 12,252 crore spent in FY22.
The Centre provides resources to states through ministries/departments under the heads of tax devolution, Finance Commission transfers, centrally sponsored schemes, central sector schemes, additional central assistance for externally aided projects, special assistance etc.
The central tax devolution is estimated to exceed FY23BE by Rs 1.31 trillion to reach Rs 9.48 trillion as per RE for the year. However, the total central transfers to states are estimated to increase by Rs 1 trillion to Rs 17.1 trillion in FY23RE, an increase of around 6% over the BE of Rs 16.1 trillion. The states are losing about Rs 31,000 crore on a net basis (after adjusting for the increase in some heads in RE) due to Rs 43,000 crore reduction in grants and loans.
The Centre cut back the grant-like 50-year interest-free loans to states by Rs 24,000 crore to Rs 76,000 crore in FY23RE from the initial estimate of Rs 1 trillion as about eight states could not utilise their quota fully due to delay in meeting conditionalities.