States' tax revenues lower than two years ago as demand for spending rises

An analysis of 17 states shows that while states' revenue spending in April-June 2021 was 14% higher than the same period in 2019, own revenues were 8% lower

The April-June quarter (Q1) of 2021-22 was a period of contradictions. It was when India faced the deadliest coronavirus surge since the pandemic began, but it is also when Indian companies made record profits.

What's more, the Government of India also earned record revenue. But a Business Standard analysis of 17 states shows that the same is not true for state governments. In fact, their tax revenues are lower than those earned two years ago.

The 17 states earned Rs 3.11 trillion in Q1FY22, nearly twice the amount in the same period previous year, or the pandemic year 2020-21. But they had earned Rs 3.38 trillion in Q1FY20. These figures pertain to their own tax revenues.

Only three states among the 17 showed higher tax revenues compared to the numbers two years ago: Telangana, Punjab, and Haryana, while those in Gujarat and Rajasthan remained flat. Tax revenue fell for as many as 12 of them.

Contrast this to the central government’s gross tax revenue, which grew from Rs 4 trillion to Rs 5.3 trillion over the same two-year period. This includes states’ share in central taxes.

But as their tax revenues were eight per cent lower than the figures two years ago, and even their share in tax collected by Centre was 23 per cent lower than two years ago, they did not compromise on revenue expenditure.

Revenue expenditure, or the spending on current items, administrative expenses, salaries and pensions, and most importantly, welfare schemes, rose by 14 per cent over two years.

Revenue expenditure was raised last year too, by both the Centre and the states, in order to minimise the economic impact of the pandemic. The trend has continued this year.

But the brunt has been borne by capital expenditure, or public spending made on productive assets such as roads, machinery and infrastructure projects.

Capex is flat compared to two years ago, at Rs 54,000 crore in Q1FY22. It had dropped to Rs 24,000 crore in Q1FY21, as the pandemic urgency had prompted governments to change their spending priorities.

The Central government, on the other hand, spent 77 per cent more than two years ago on capex in Q1FY22, and 27 per cent more than a year ago.

Kerala has faced the biggest revenue shock, with the state’s own tax revenues 27 per cent lower than two years ago in Q1. Big, industrialised states like Maharashtra, Karnataka, and Tamil Nadu suffered a 10 per cent drop in tax revenue.

Apart from goods and services tax (GST) which is levied by states as it is by the Centre, states earn their own revenue mainly from sales tax, or value-added tax, state excise duties and stamp duties. Most of their own revenue revolves around a few commodities like petrol, diesel, liquor, cigarettes, and houses.

It seems that states’ revenue mobilisation from taxes on these products and services has not recovered in Q1 of FY22.

Uttar Pradesh, India’s biggest state which is headed for polls within six months from now, leads in capital expenditure, with Rs 9,700 crore in Q1FY22. Madhya Pradesh comes in a close second, followed by Haryana. Punjab, Jharkhand, and Maharashtra fall short on capex in Q1.

States’ earnings from devolution of central taxes is also substantially lower. The 17 states have reported Rs 68,000 crore as their share in Centre’s gross tax revenue in Q1FY22, which is lower than Rs 80,000 crore received in Q1 of last year, and way lower than Rs 87,000 crore received in Q1FY20.

Lower devolution from the Centre was because the Centre applied the same monthly formula as last year (pandemic year). The Centre usually shared 7 per cent, or 1/14th of the annual Budgeted devolution to states per month from April to February, followed by payout of the remainder in March, the last month in the financial year.

While this was the case in 2019-20, the Centre reduced the share in 2020-21 as it was certain that its gross tax revenues will take a hit. It continued with this formula with reduced monthly transfer this financial year too, affecting the devolution in Q1 FY22.

But experts said that states would get their fair share July onwards. “The Centre probably has gone back to the original formula for monthly tax devolution sharing, preliminary July figures suggest,” said Aditi Nayar, chief economist at Icra Ratings.

Based on her analysis, the central tax devolution rose to Rs 47,500 crore this July, from the monthly average of Rs 39,200 crore in Q1FY22.

“If the monthly devolution continues at this pace till February 2022, it will boost the cash flows of state governments and revenue visibility may help them to front load expenditures, which would also be supportive of growth,” she added in her note.

Despite a fall in own taxes as well as Centre’s share, states borrowed not just less than the previous year, but also less than their borrowing plan in Q1 FY22.

According to Care Ratings, state government borrowings were 4 per cent lower than the plan in Q1, and 10 per cent lower than borrowings in Q1 FY21.