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In 2023-24, states’ own revenue (as percentage of GDP) was comparable to levels seen in 2018-19. However, total revenue receipts continue to be lower than in 2018-19 due to declining central transfers. There has been a marginal increase in states’ capital outlay, helped by long-term loans given by the Centre. States’ revenue from SGST in 2023-24 exceeded pre-pandemic levels. Mineral rich states can also raise additional revenue from mining post a Supreme Court judgement. On the expenditure side, several states are implementing cash transfer schemes for women. In addition, they may also have to incur additional expenditure if they switch to the unified pension scheme. Poor financial conditions of state-owned discoms continue to present challenges to state finances. In this backdrop, this report analyses the finances of all states and Union Territories of Delhi, Jammu and Kashmir, and Puducherry, based on their budget documents and CAG accounts. The following abbreviations have been used for states in the charts throughout the report.
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Contents
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Section |
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Developing Themes in State Finances |
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State finances in post COVID period |
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Discretion with states over revenue and expenditure |
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Trends in GST revenue |
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Implementation of unified pension scheme |
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Cash transfer schemes for women |
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Grants for centrally sponsored schemes |
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Finance commission grants for local bodies |
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Revenue from minerals |
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Performance of power distribution companies |
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Trends in State Finances |
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i. Receipt |
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ii. Expenditure |
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iii. Debt and Deficit |
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iv. Credibility of Budget Estimates |
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v. Trends in Sector-wise Outlay |
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Annexure |
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Glossary of Key Terms |
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DEVELOPING THEMES IN STATE FINANCES
States’ own revenue revives while deficit levels increase marginally post-COVID
Revenue receipts of states declined between 2018-19 and 2020-21 due to economic slowdown in 2019-20, followed by the COVID-19 pandemic. This led to an increase in borrowings and states’ total liabilities increased to 31% of GDP in 2020-21. Since then, own revenue receipts of states have revived back to pre-COVID level, and debt levels have decreased.
States have limited discretion in raising revenue and planning expenditure
Around 60% of the overall government expenditure in the country is through state budgets. However, states enjoy limited discretion in raising revenue and planning expenditure. In 2022-23, 53% of their receipts came from non-discretionary sources. On the expenditure side, around 55% of the expenditure was largely inflexible in nature.
Revenue from SGST in 2023-24 above pre-COVID levels
In 2023-24, the total SGST revenue of states overtook the levels seen in 2018-19. RBI noted that SGST revenue has benefitted from revival in economic activity and improved tax administration. The GST Council has formed a Group of Ministers to consider replacing the compensation cess. Currently, cess is being utilised to pay back loans taken to cover shortfall in compensation during COVID. Thus, both Centre and states stand to gain revenue if the compensation cess is subsumed within GST slabs.
Shifting to Unified Pension Scheme could involve additional expenditure for states
In August 2024, the Union Cabinet approved the Unified Pension Scheme for its employees. The scheme seeks to provide assured pension to central government employees with an increase in government contribution under the scheme. States that choose to implement UPS for their employees may have to incur additional expenditure.
Several states are implementing cash transfer schemes for women
In 2024-25, nine states are estimated to cumulatively spend over one lakh crore rupees on implementing cash transfer schemes for women. These states include Chhattisgarh, Karnataka, Maharashtra, and West Bengal. Impact on the budget varies across states. Implementing cash transfer schemes can improve consumption capacity of the beneficiaries.
Per capita grants under centrally sponsored schemes lower for some poorer states
Since 2015-16, central grants for CSS have formed over 20% of total central transfers. These schemes are designed by the Centre and implemented by states. They aim to ensure minimum standards of public services across states. Average per capita CSS grants have been lower for some poorer states such as Bihar and Uttar Pradesh. States with lower fiscal and implementation capacity face challenges in implementing these schemes.
States can raise additional revenue from minerals post Supreme Court judgement
In July 2024, the Supreme Court upheld the power of states to tax mineral rights. It also allowed states to recover retrospective demands from such levies. States can gain additional revenue from imposing levies on minerals.
Discom losses increase driven by higher power purchase costs
Losses incurred by state-owned discoms doubled in 2022-23 over the previous year. This was driven by an increase in power purchase costs due to increased dependence on imported coal and an increase in price of imported coal. Persistent losses could hinder investments in upgrading electricity distribution infrastructure.