Budget 2022: Centre's move to ramp up state finances tight-fisted

Devolution to grow 13% to Rs 8.1 trn in FY23. Power reforms to allow borrowing up to 4% of GSDP in addition to Rs 1 trn capex loans. But funding for centrally-sponsored schemes stagnates

The Union Budget 2022-23 has given states reasons to cheer in terms of interest free capex loans worth Rs 1 trillion, but it has also held a tight fist in terms of devolution and financing centrally sponsored schemes, ultimately affecting cash flow from Centre to states.

Capitalising on its successful experiment of providing back to back loan to states in lieu of compensation due to shortfall in goods and services tax (GST) revenues, the Centre provided a similar loan assistance to states for capital expenditure last year. Raising it from Rs 10,000 crore to Rs 15,000 crore for this fiscal, the Centre has promised Rs 1 trillion worth of such loans to states in 2022-23 (FY23).

States can use funds through this channel for implementing projects under PM Gati Shakti, the national master plan for infrastructure development, and including rural roads, digitisation, and better town planning. 

In addition, states can now borrow up to 4 per cent of gross state domestic product (GSDP) in FY23, but they can go above 3.5 per cent only if they commit towards expediting power sector reforms within. The top 0.5 per cent is contingent upon reforms such as progressive assumption of responsibility for losses of power distribution companies, transparency in accounting of subsidies, liabilities, and so on.

Though this provision was announced in June 2021, proposals of only two states, Andhra Pradesh and Rajasthan, have been accepted to date. 

States together registered a fiscal deficit of 4.6 per cent in FY21 (RE), and have budgeted it at 3.7 per cent this fiscal.

Though devolution is rising this year and in FY23, states have got less than the potential of 41 per cent mandated by the 15th Finance Commission.

In FY23, devolution—or transfers from Centre to states on account of the latter’s share in taxes collected by the former—is set to grow 13.3 per cent to Rs 8.1 trillion. Against the 9.6 per cent growth in gross tax revenues (GTR), states seem to be getting a good bargain.
 

But the actual amount translates to only 29.6 per cent of GTR, much lower than 41 per cent. As the Centre levies a considerable portion of its revenues in the form of cess or surcharge, on which states do not have any claim, states end up getting a share that is smaller than 41 per cent.

Now, devolution for FY22 has been higher in the Revised estimates (RE) than the initial expectation made in Budget estimates (BE) by 8 per cent, on account of good buoyancy in tax revenues.

However, this growth falls pale in front of the 24 per cent growth achieved in gross tax revenues collected by the Centre. More than 99 per cent of excise duties collection of Rs 3.94 trillion in FY22 is in the form of cess, giving it in near entirety to the Centre, thus affecting the share of states.

Apart from devolution, Centre transfers money to states through the implementation of centrally sponsored schemes (CSS). These schemes are initiated by the Centre, but funded by both Centre and states, and include MGNREGA (rural employment guarantee), PM Awas Yojana (housing for poor), Jal Jeevan Mission (potable water in all homes), and so on.

Centre’s funding towards CSS is slated to grow only 2 per cent in FY23 (BE), after growing 5.8 per cent in FY22 (RE). A mere 2 per cent in FY23 may also have come due to enhanced spending in FY22 on schemes like MGNREGA.

While the allocation towards National Health Mission has increased by 8 per cent, that towards National Education Mission has seen a good raise of 28 per cent. The umbrella scheme for child development, Integrated Child Development Services has seen no growth in financial allocation over nearly two years.

Then there are Centre to states grants based on recommendations by the Finance Commission in force. This includes revenue deficit grants, and states which had revenue shortfalls due to pandemic led disruption have received considerable funds from the Centre under this head.