Statsguru: Robust taxes ease burden of freebies on state governments

The evolving dynamics of state-level politics in India highlight the increasing prominence of welfare schemes and subsidies as decisive factors in elections. Often criticised as “revdi culture”, these promises have become central to political manifestos across parties, as seen even in the recent Maharashtra and Jharkhand elections.

 

The compound annual growth rate (CAGR) of aggregate subsidies in states significantly outpaced the CAGR of their own tax revenue (OTR) in the period from 2018-19 to 2023-24. During this period, their combined subsidy bill rose from Rs 1.87 trillion to Rs 4.73 trillion, reflecting a CAGR of 20.4 per cent. Their OTR grew from Rs 12.15 trillion to Rs 21.23 trillion, recording a CAGR of 11.8 per cent (Chart 1). 

 

 As such, the share of subsidies in states' revenue receipts has steadily increased, rising from 7.1 per cent in 2018-19 to a projected 11 per cent in 2023-24. Simultaneously, their OTR has also grown and is expected to account for 49.3 per cent of their revenue receipts in 2023-24, up from 46.4 per cent five years earlier (Charts 2 and 3).   

 

Rising OTRs have helped states rein in fiscal and revenue deficits within manageable limits (Chart 4). 

 

The combined capital outlay of states as a percentage of their total expenditure, too, is projected to rise in 2023-24, surpassing pre-pandemic levels (Chart 5). 

 

The Aam Aadmi Party (AAP) government in Delhi has often been criticised by others for its freebie politics. However, it had one of the lowest subsidy-to-revenue-receipts ratios in 2023-24. In contrast, among the top 10 states by this parameter, the ratios of nine exceed 10 per cent, with Punjab, the other AAP-ruled state, having the highest at 21 per cent (Chart 6).