🏛️ Public Finance & Governance

💸 Indian States’ Rising Dependence on Central Transfers – A Challenge to Fiscal Autonomy

Recent data highlights a significant shift in India’s fiscal landscape, with States increasingly dependent on Central transfers to fund their budgets.
While financial devolution is essential to balanced governance, persistent reliance raises concerns about fiscal sustainability and the erosion of States’ revenue-generating autonomy.

📈 Rise in Central Transfers – Trend Over the Decade

• FY16–FY25: Central transfers account for 23–30% of State revenues
• 2000s and early 2010s: This share was 20–24%

This upward trend signals a greater dependency on Union allocations, especially through grants and tax devolution.

💼 Decline in States’ Own Tax Revenue

• Below 50% of total revenue for over a decade
• In contrast, during the 2000s, own tax revenue often exceeded 50%
• Indicates:
  • Reduced fiscal self-reliance
  • Greater pressure on external sources for funding

📉 Non-Tax Revenue Trends – A Historic Low

• Projected to fall below 24% in FY25
• Marks the lowest point in 25 years
• Includes:
  • Grants
  • Fees for services
  • Interest receipts

Non-tax revenues are no longer providing a stable fiscal buffer.

🧾 SGST – Filling Part of the Gap

• State GST (SGST) has grown from 15% of total revenue in FY18 to 22% in recent years
• However, excluding SGST:
  • Own tax revenue has declined from 34% to 28%

SGST provides some stability, but doesn’t fully offset declines in other revenue sources.

🎁 Central Grants – Dominating Non-Tax Revenue

• 65–70% of non-tax revenue now comes from Central grants
• Up from 55–65% in earlier decades
• Raises concern over:
  • Conditional funding
  • Limited flexibility in resource use

This growing reliance can constrain local decision-making and development planning.

🧮 Challenges in Tax Collection

• Many States face issues with:
  • Tax base expansion
  • Collection efficiency
• Sporadic attempts in:
  • Stamp duty reform
  • Vehicle tax optimisation

Without sustained effort, tax mobilisation remains weak and uneven.

🌐 Inter-State Variations

• Decline in own tax revenue-to-GSDP ratio:
  • Tamil Nadu, Kerala, and others
• Stagnation in several States, despite economic growth

This signals a disconnect between economic activity and tax realisation at the State level.

⚠️ Fiscal Sustainability – Growing Risk

• Limited own revenue = reduced fiscal flexibility
• Constrains:
  • Public investment
  • Welfare spending
  • Demand stimulation
• Experts warn:
  • This path is unsustainable in the long term
  • It risks deepening fiscal imbalances

🕯️ True federal strength lies not only in shared resources, but in shared responsibility.