Mapping states’ fiscal health

RAISING TAX REVENUE AND IMPROVING USER CHARGES EMERGE AS KEY DRIVERS OF STATES' FISCAL SUSTAINABILITY

- R GOPALAN MC SINGHI The authors are former civil servants

STATE FINANCES DEPEND on the instruments used, resources raised, and their allocation to different sectors consistent with the population and priorities. States have significant autonomy in allocation of available resources; however, the availability of resources to a considerable extent is exogenously determined. Tax transfers from the Union are governed by the Finance Commission (FC), which recommends vertical sharing of tax resources of the Union with the states and horizontal sharing of the divisible pool among the states. Further, the Union also provides grants.

Fiscal consolidation (exclusively in the states' domain) includes raising tax resources, improving user charges for the services, maintaining current expenditure to the level of its revenue receipt, and prioritising expenditure consistent with citizens' aspirations. We use six parameters, each an average of the past 10 years, comprising the award period of the 14th and 15th (FCs) to develop a composite index of fiscal health based on the ratio of state revenue to total revenue, ratio of states' tax revenue to GSDP (STRG), development expenditure as percentage to total expenditure, ratio of total revenue to total expenditure (RE), and user charges for the economic and social services.

The figures reveal that STRG varies from a low of 3.32% for Mizoram to a high of 7.73% for Telengana. While most northeastern States have a very low STRG, it exceeds 6% for Tamil Nadu, Punjab, Haryana, Andhra Pradesh, Madhya Pradesh, Karnataka, Odisha, Rajasthan, Maharashtra, Goa, Chhattisgarh, Uttar Pradesh, and Telengana. Gujarat (5.3) and West Bengal (5.7) have a relatively low STRG.