Devolution, not debt, Pg8

Key Highlights:

• State Development Loans (SDLs) are increasingly crucial for states' daily spending, comprising 35% of Tamil Nadu's and 26% of Maharashtra's revenue in 2024-25.
• Since COVID-19 in 2020-21, states' reliance on SDLs has grown due to inadequate central tax devolution.
• The 15th Finance Commission fixed states' share at 41% of the divisible pool, but cesses and surcharges outside this pool have reduced the effective resource flow.
• GST introduction in 2017 weakened the link between tax effort and reward for industrialized states.
• West Bengal, heavily reliant on central devolution (47.7% of revenue), still borrows significantly, with SDLs averaging 35% of its revenue.

Detailed Insights:

• States are using SDLs and borrowings by State PSUs to fund routine revenue expenditure, including welfare commitments like pensions and health insurance.
• Increased borrowing limits funds available for public capital expenditure and private investment, hindering economic growth.
• The growing dependence on debt over devolution threatens fiscal sustainability, raising debt-to-GSDP ratios and weakening revenue streams.
• The current system erodes states' fiscal autonomy, potentially leading to serious macroeconomic consequences.
• There is a need to rework horizontal devolution criteria to prioritize tax effort and efficiency, and to include cesses and surcharges in the divisible pool.

Key Concepts Involved:

• State Development Loans (SDLs): Bonds issued by state governments to raise funds from the market.
• Divisible Pool: The portion of central government taxes that is shared with states as per the Finance Commission's recommendations.
• Fiscal Autonomy: The ability of a state government to manage its finances independently, including taxation and borrowing.