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Budget 2022: Non-BJP states looks askance at the Centre’s financial muscle

While constitutional obligations will have to be met, there is huge discretionary powers with the Centre; states are looking at adjusting to life after the cessation of the GST compensation by June-end

January 31, 2022 / 07:26 PM IST
The tussle between the Centre and states over allocations is by no means new. (Photo by George Becker from Pexels)

The tussle between the Centre and states over allocations is by no means new. (Photo by George Becker from Pexels)

In these days of shaky federalism, states – particularly non-BJP ones - will be looking closely at the budget. The trend thus far should stick to form; politics- for that one day of the Union Budget, takes a back seat, apart from routine disagreements by those in the political opposition.

Yet, one can never be sure, until the Budget papers are laid out on the floor of the Parliament.

``Disagreements between the ruling party at the Centre and the states is by no means new. States have in the past – mostly during the heyday of the Congress rule - protested against allocation of resources to non-Congress parties in a big way,” said Prof Arun Kumar, well-known economist who has spent many years in JNU.

Nonetheless, what tops the states’ concern is how they will adjust to life after the cessation of the GST compensation.

Ending of a chapter


The original five-year transition period for which the states are to receive such compensation, comes to an end in June 2022, making this Union Budget crucial to their concerns.

Read also: Economy Survey 2022 Live updates

Points out Aditi Nayar of ICRA: ``On a cash flow basis, we foresee a sharp step down in the compensation amount that the states will get in FY2023 relative to FY2022. However, ICRA estimates that the tax devolution to the states will expand by a robust 16.4 percent to Rs. 8.6 trillion in FY2023. This is appreciably higher than the 9.3 percent growth that we have forecast for the government’s gross tax revenues, as the component of cesses on fuels that are expected to contract in FY2023, is not shared with the states.”

She told Moneycontrol that enhanced tax devolution will help to soften the impact of the moderation in the GST compensation flows.

For FY2023, the Fifteenth Finance Commission (15th FC) had recommended a normal borrowing limit of 3.5 percent of the gross state domestic product (GSDP) for the state governments, which has been accepted by the central government.

GSDP is the sum of all value added by industries within each state or union territory and serves as a counterpart to the national gross domestic product (GDP).

Experts believe that, if the GST compensation comes to a stop, it could cause the state governments’ fiscal deficit to rise to the cap of 3.5 percent of GSDP set by the 15th FC, from an estimated 3.3 percent of GSDP in FY2022.  It may also allow the states to prioritise capital spending, complementing the central government’s efforts.

States need handholding

NR Bhanumurthy, Vice-Chancellor B R Ambedkar Economics University, Bengaluru, believes that GST compensation to states should continue for some more time. ``States need to have much more handholding. This is needed especially given the instability of revenues faced by them. They need predictable resources so they can plan better for the next year,” he told Moneycontrol.

In his view, the Budget should focus on bringing down the public debt to GDP ratio from current level of 90 per cent to 70 per cent over the next few years, as suggested by the Fifteenth Finance Commission.

The Finance Commission is very clear in what states need to be given and there is no reason to believe that the Centre will do it any other way. As it is, most of the schemes, such as MNREGA and rural employment are demand driven. ``So, unless we suspect the Finance Commission itself, I don’t foresee any trouble as far as sound allocation to all states is concerned,” said Bhanumurthy.

Economist Arun Kumar is quick to point out, however, that it is the Centre, which collects the resources even for the Finance Commission - thereby hinting at New Delhi’s large discretionary role.

The fear of the pandemic is far from over. Fresh restrictions being introduced by several states to curb the spread of Covid-19 may temporarily interrupt economic recovery and moderate the growth of tax collections in December-March FY2022 relative to the trend seen up to November 2021.

Trend in tax collections

Experts tend to project flattish personal income tax collections in the last four months of this fiscal, given the high base of March 2021, related to the taxes received under the Vivad se Vishwas scheme.

Nonetheless, some expect corporate tax collections to grow by 5-10 percent on a year-on-year (YoY) basis in the remainder of this fiscal, benefitting from the continued formalisation of the economy amidst the uncertainty engendered by Omicron.

The tussle between the Centre and states over allocations is by no means new. In 1980, acerbic Bengal Communist leader Ashok Mitra had provided the theoretical ammunition to the party's charge that the then ruling Congress (I) had been persistently denying the states their due share of the nation's resources by expropriating colossal amounts as direct and indirect Central levies.

The bespectacled, dhoti-clad Mitra had been both respected and feared for his vitriolic-campaign against the Centre's fiscal policies and had become the unannounced spokesman of regional parties, alleging discrimination at the hands of the Congress.

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Ranjit Bhushan is an independent journalist and former Nehru Fellow at Jamia Millia University. In a career spanning more than three decades, he has worked with Outlook, The Times of India, The Indian Express, the Press Trust of India, Associated Press, Financial Chronicle, and DNA.
first published: Jan 31, 2022 07:26 pm
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