India's Federal Structure and Fiscal Capacity
India's federal structure is based on a balance between the Government of India’s (GoI) revenue-raising powers and the states' expenditure responsibilities. While theoretically, more populous states should have stronger fiscal capacity due to their broad consumption base and economic diversity, recent trends indicate a decline in their fiscal strength.
Trends in State Finances
- A CAG analysis from 2013-14 to 2022-23 shows a decrease in the fiscal capacity of the 10 most populous states: UP, Maharashtra, Bihar, West Bengal, MP, Tamil Nadu, Rajasthan, Karnataka, Gujarat, and Andhra Pradesh.
- Their combined share in total revenue receipts of all states fell from 74.4% to 68.9% over a decade.
Components of State Revenue
A state's total revenue is built on four pillars:
- Tax revenue.
- Constitutionally-mandated share in Union taxes.
- Non-tax revenues (e.g., royalties, dividends, user charges).
- Grants-in-aid from GoI.
Own tax and non-tax revenues are key indicators of fiscal autonomy and governance quality.
Decline in Own Revenue Mobilization
- Across all states, own tax revenue contributes around 48%, and non-tax revenue about 8% of total receipts.
- Among the populous states, own tax revenue declined from 56% to 51%, and non-tax revenue from 8.8% to 5.3% between 2013-14 and 2022-23.
Disparities Between States
- Maharashtra leads with 68% of its revenue from its own taxes.
- Karnataka and Gujarat collect over 50% of their revenues from their own sources.
- UP and West Bengal rely on own taxes for about 42%, while Bihar at only 25%.
- Odisha and Chhattisgarh excel in non-tax revenue due to mineral royalties.
Challenges and Recommendations
- Limited tax base diversification and weak urban taxation are major issues.
- Neglected non-tax revenue sources and increased dependency on Union taxes are concerning.
To address these challenges, states should:
- Improve revenue through better administration and policy innovation.
- Strengthen tax administration using digital analytics and technology.
- Expand non-tax revenues by monetizing tourism, water use, and environmental services.
- Empower local bodies to raise and retain taxes for improved services.
Conclusion
Rebuilding the revenue base of states is crucial for cooperative federalism and fiscal balance. Incentive-based transfers from GoI that reward fiscal prudence can further encourage states toward self-reliance.
