Page 59 - CII-ARTHA

MARCH 2026

Coming to the revenue side, states’ total receipts The evolving composition of state finances reveals that
(excluding borrowings) are primarily composed of own fiscal stress arises from structural rigidities (rather than
tax revenue, non-tax revenue, and transfers from the shocks) on both the revenue and expenditure sides.
Centre, and have broadly remained stable as a share of These rigidities can reduce fiscal space, even when
GSDP in recent years, with variations driven by shifts aggregate indicators appear stable.
between tax devolution and grants rather than a
significant expansion in overall resource mobilization.
Emerging Issues and Way
States’ own tax revenues are heavily concentrated, with
State Goods and Services Tax (SGST), sales tax, excise Forward
duties, and stamp duty and registration fees (SDRF) Beyond conventional deficit and debt metrics, a key
together accounting for nearly 90 per cent of total concern is the rise in off-budget borrowings, often
collections. States’ own tax revenue has improved from undertaken through state-owned entities such as power
5.9 per cent of GDP in 2020–21 to 7.1 per cent in 2025–26 distribution companies (DISCOMs). These liabilities
(BE), reflecting recovery and improved tax buoyancy. create future repayment obligations and weaken fiscal
SGST and excise revenues remained strong, while sales transparency. The 16th Finance Commission mandates
tax grew modestly. Meanwhile, SDRF collection efficiency that off-budget borrowings of states should be
improved steadily since 2021–22 due to reforms and terminated.
digitalization. Non-tax revenues are expected to improve
with state-level measures, such as mineral taxation In parallel, contingent liabilities, including state
(Karnataka), mining reforms (Rajasthan, West Bengal), guarantees, have been rising, adding to fiscal
and other institutional initiatives by states. vulnerabilities, as reported by the RBI State Finances

(January 2026). Recent estimates show that outstanding
State revenue receipts were constrained in 2023–24 and guarantees have nearly doubled over the past decade,
2024–25 due to a sharp fall in central grants (GST signaling growing fiscal risks outside the budgeted
compensation and post-devolution deficit grants), even framework. These risks are compounded by political
as tax receipts remained strong. According to the economy dynamics, particularly the expansion of welfare
recommendations by the 16th Finance Commission (FC), schemes, increasing subsidies and “Direct Benefit
41 per cent of the divisible pool of central taxes comprises Transfer” (DBT) Schemes. Additionally, climate-related
tax devolution to the states. Trends show that sharable shocks and disaster expenditures are emerging as new
taxes have remained stable and have been the major sources of fiscal stress, especially for vulnerable states.
component of central transfers. However, grants-in-aid
peaked during the pandemic but moderated thereafter. Addressing the structural pressures in state finances
Further, states received post-devolution revenue deficit requires a balanced approach that maintains fiscal
grants, with states like West Bengal, Kerala, Andhra discipline without losing sight of development needs.
Pradesh, Himachal Pradesh, Punjab receiving high Consolidation should not undermine growth, and states
shares. However, the recommendations by the 16th FC must strengthen revenue mobilization while using
has substantially reformed fiscal federalism by eliminating resources more efficiently, so that they can create fiscal
post-devolution revenue deficit grants for states, space without compromising investments in
encouraging them towards fiscal consolidation. This infrastructure, human capital, and social welfare.
indicates a post-COVID transition from grant-based
support to tax devolution-led transfers, reducing
discretionary fiscal support for states.

The expansion in capital outlay occurs alongside
structural changes in the tax framework, with the GST
regime reshaping states’ revenue composition and
increasing their reliance on shared revenues and central
transfers. Consequently, central transfers have
emained broadly stable at around 6 per cent of GDP,
underscoring continued dependence on
intergovernmental transfers. Moreover, there is
considerable variation across states in revenue
mobilization capacity, reflecting differences in economic
structure, administrative efficiency, and tax bases.

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