Editorial: Strengthening Fiscal Devolution to States Amidst Rising Reliance on Debt
This analysis highlights the growing fiscal strain on Indian States due to inadequate Central tax devolution. Despite the 15th Finance Commission's 41% share recommendation, the effective flow is eroded by the Centre's increasing use of cesses and surcharges, which remain outside the divisible pool. Consequently, States are increasingly relying on State Development Loans (SDLs) to fund routine expenditures and welfare schemes. In 2024-25, SDLs accounted for 35% of Tamil Nadu's and 26% of Maharashtra's total revenue receipts. The editorial argues for bringing cesses into the divisible pool and reworking horizontal devolution criteria to give greater weight to tax effort and efficiency.
Key Points
- States are increasingly dependent on State Development Loans (SDLs) for day-to-day spending needs.
- Cesses and surcharges are excluded from the divisible pool, reducing effective devolution to States.
- The 15th Finance Commission fixed the States' share at 41% of the divisible pool.
- High reliance on debt over devolution threatens the fiscal sustainability of India's federal system.
- The fiscal link between tax effort and reward has weakened since the introduction of GST in 2017.
Exam Facts
- 15th Finance Commission share: 41%.
- SDLs as % of revenue (2024-25): Tamil Nadu (35%), Maharashtra (26%).
- West Bengal's average dependence on Central devolution: 47.7%.
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