Why in News: The CAG’s decadal analysis highlights the uneven fiscal performance of Indian States.
Context: Uttar Pradesh reported a ₹37,000 crore revenue surplus, sparking debate on the real meaning of surpluses and sustainability of welfare spending.
Key Trends
1. Improvement in 2010s
- Reforms, GST, better tax collection, and growth brought many States into surplus.
2. Pandemic Shock
- Revenues shrank, spending surged, borrowings rose across States.
3. Vertical Imbalance
- Rich States (Maharashtra, Gujarat) generate high internal revenues.
- Poorer States depend heavily on Union transfers (e.g., UP: only 42% own revenue).
4. Volatile Revenue Sources
- Kerala: lotteries; Odisha: mining royalties; Telangana: land sales.
- Unsustainable as they depend on demand, global prices, or one-time assets.
Borrowing Patterns
- High Borrowers: Andhra Pradesh (35% of GSDP), Bihar (39%), Punjab (45%), Rajasthan (40%).
- Moderates: Gujarat (~20%), Maharashtra (~20%).
- Volatile: Karnataka, Kerala spiked during pandemic; Odisha reduced borrowings to ~15% GSDP.
- Mizoram, Nagaland, Himachal Pradesh carry 40-60% debt/GSDP, marking fiscal stress.
The Welfare Paradox
- Accounting surpluses ≠ developmental gains.
- States rely on off-budget borrowings, guarantees, GST compensation delays.
- Populist schemes (farm waivers, free power, subsidies) increase hidden fiscal stress.
- India sustains a large welfare state but with a thin fiscal base, heavily dependent on debt.
Way Forward
1. Enhance Own Tax Revenues – strengthen GST efficiency, property tax, mining regulation.
2. Rationalise Expenditure – prioritise capital over populist spending.
3. Debt Transparency – integrate off-budget borrowings into fiscal accounts.
4. Cooperative Federalism – fair devolution of resources, GST compensation clarity.
5. Fiscal Discipline – adhere to FRBM norms while safeguarding welfare.
Conclusion
India’s fiscal federalism faces a paradox: a vast welfare state built on fragile revenues. Sustainable growth demands balancing welfare ambitions with fiscal prudence and transparent borrowing practices.
UPSC Relevance
GS Paper II (Governance & Polity)
- Fiscal federalism and vertical imbalances.
Mains Practice Question
Q. “Indian States are witnessing a paradox of large welfare spending built on fragile fiscal bases and rising debt dependence.” Critically analyse with reference to CAG’s findings on States’ macro-fiscal health. (250 words)