By Srinath Sridharan & Dakshita Das,
The latest RBI ‘State Finances: A Study of Budgets of 2023-24’ report highlights the fiscal challenges plaguing numerous states. While the RBI cautiously projects a marginal improvement, anticipating states’ debt to decrease to 29.5% of GDP in 2022-23 from 31.1% in 2020–21, this starkly remains above the prudent threshold of 20% set by the Fiscal Responsibility and Budget Management Act, 2003, Review Committee. The persistence of this fiscal imbalance demands attention and corrective measures.
The soaring debts of states underscore a troubling trend, revealing imperfect economic thinking at the sub-national level. Reverting to the old pension scheme, for instance, not only means a significant fiscal burden but also undermines the flexibility needed for boosting capital spending. Such decisions compromise the very economic fabric these states aspire to build, fostering doubt over their long-term financial prudence. The 16th Finance Commission faces a formidable challenge as the constitutional entity responsible for devising the methodology to determine Centre-state relationships over a five-year period including sharing of revenue between the Centre and states, grants for state-specific needs.
Of the various issues the Commission may consider, the impact of indiscriminate freebies amid financial stress in states is an important one. Additionally, it may consider the financial impact of the resurgence of the old pension scheme in various states. It should increase the weightage assigned to the Human Development Index (HDI) and SDGs while incorporating India’s climate goals into its formula. The commission improving upon the conditions linked to fiscal transfers to urban and rural local bodies, ensuring the efficient utilisation of funds, also remains a major concern.
Furthermore, an array of challenges compounds the situation, encompassing enduring economic volatility, inflationary pressures, geopolitical uncertainties, and climate change. These factors collectively overshadow precise fiscal planning, rendering revenue projections and resource allocation an arduous undertaking. Despite these obstacles, it is imperative to underscore the significance of striking a balance in revenue devolution, considering both vertical aspects (revenue-raising capacity) and horizontal factors (infrastructure and development disparities). With the rise of a consumption-driven economy, the imperative to balance it with socio-economic prudence becomes more pronounced.
Amid these challenges, the imperative of addressing women’s empowerment cannot be overlooked. In theory, attaining political consensus on gender issues ought to be within reach for the Commission, as no political party openly opposes it. However, the true challenge lies in compelling states to honour their financial commitments and adhere to responsible fiscal behaviour in this regard. While states have various options, they are oblivious to long-term financial concerns and societal impacts of fiscal policies unless regulations enforce prudence.
Currently, for many states, the go-to revenue source—often at the expense of developing capacities in other revenue generating sectors—is the taxation of alcohol. According to a recent industry report, alcohol revenues account for 1.2% of India’s nominal GDP, 7.7% of the total tax collection, and a striking 11.7% of the nation’ indirect tax revenue. States are increasingly reliant on alcohol for revenue, with one in every seven rupees expected to be generated from state excise duties levied on it. In fact, if devoid of contributions from alcohol consumers, many states would find themselves forced to borrow funds for their social service expenditure or struggle to meet even half of their pension obligations.
The discourse on alcohol consumption is stark, demanding states to tread a sensitive line between the compulsion to generate tax revenue and the imperative to confront the adverse fallout of rampant drinking. While alcohol has entrenched itself in human history, the critical query persists: does the toll of detrimental consequences from drinking overshadow its role in states’ revenue generation and obstructs its moral societal obligations?
In certain instances, many states take on the conflicting roles of both producer and distributor of alcohol, exploiting liquor sales as a readily available means to fortify state treasuries. This excessive dependence on alcohol-derived revenues reflects a complacent and unsustainable governance approach. It conveniently sidesteps the need for proactive efforts to attract investments, hindering the exploration of more innovative and enduring income sources. These revenues demand minimal effort, often at the expense of societal well-being, as the repercussions of excessive alcohol consumption manifest in a host of social problems. From family disruptions to health crises and elevated crime rates, the toll is significant. States, fixated on escalating revenues, inadvertently become accomplices in social injustice, perpetuating societal issues through their reliance on alcohol.
For many states, these revenues form a considerable chunk of their income, perpetuating what can be labeled as the “lazy-economic model” of fiscal planning. The crux of the matter is that reliance on alcohol revenues discourages states from seeking out more innovative, sustainable, and equitable methods for income generation. Urgent measures are required to overhaul state-level policies, rendering them enticing for investments, tapping into the potential of the population, and capitalising on the unique geographical advantages each state possesses. In the pursuit of gender equality, the Commission must take resolute strides in reaffirming its commitment to this cause.
To enact meaningful change, it is important for the Commission to exclude revenues generated from alcoholic beverages when computing the Gross State Domestic Product (GSDP) for any state. This adjustment holds the potential to substantially reshape the resource allocation from the Commission, aligning fiscal policies with the overarching objective of gender equality. Additionally, this would compel states to diversify their revenue streams by fostering capacity-building initiatives to attract alternative investments and industries, as the exclusion of alcohol revenues would curtail the level of debt states can borrow (as it is linked to their SGDP).
(The authors are policy researcher & corporate advisor, and a former civil servant respectively) Views are personal.