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.