Fiscal support for states over the next five years: Is it adequate?

Overall statutory flows to states shrink as a slice of the divisible pool but the Centre's capital grants scheme could compensate

- INDIRA RAJARAMAN

The day after the Union Budget on 1 February, US tariffs on Indian exports fell from 50% to 25%, and further to a promise of 18% through a trade deal. Later, the US Supreme Court verdict against 'reciprocal' tariffs resulted in a uniform levy of 10% on all countries, including India, possibly rising to 15%.

Wherever it settles, there is some reprieve for labour-intensive export sectors. But that prospect is now overshadowed by the fear of what renewed hostilities in West Asia will do to trade flows and the price of oil.

The advance estimate of GDP released a month after the Union budget is ₹345.5 trillion for the current fiscal year. At the budget projection of 10% nominal GDP growth next year from the new base, the estimated GDP for 2026-27 drops from ₹393 trillion to ₹380 trillion. Does the nominal growth rate itself need to be upped from 10% because of the real impact of trade deals with the EU and US?

The trade deals are a long way from being finalized. Their impact on India's GDP growth rate will be visible only in 2027-28. That is also the year in which the new pay scales of the 8th Pay Commission will become operative, with arrears due for 15 months. The resulting rise in fiscal expenditure in 2027-28 may possibly get offset by higher growth in GDP and tax revenues that year. But for 2026-27, it is best to leave the nominal growth rate at the budgeted 10% because of new uncertainties around trade and oil prices.