revenue, debt service

While mounting debt remains a concern, there are also several red flags regarding the quality of government spending. There are three concerns – propensity for the income account (everyday expenses) rather than the capital account (building assets that will sustain economic activity for years to come), lack of opportunities to generate additional income, and ability to service debt. States raise funds in the form of tax and non-tax revenues and decentralization from the central government. Sources of their own tax revenues include stamp and registration fees, sales tax, state excise tax, electricity fees, occupation and entertainment tax, vehicle tax, and SGST (state goods and services tax). Tax-free income includes interest income, dividend income, and mining fees. States also receive a portion of the money the center collects from the income tax, the basic excise tax, and the supplemental excise tax. The 15th Treasury Commission recommends that the center share 41% of tax revenue with the states. Expenditure, meanwhile, accrues on income and capital accounts. Revenue expenditures include salaries, pensions, interest and subsidies, while capital expenditures include investments in infrastructure.

The imbalance in spending becomes clear when you look at the accounts of the states. For example, Maharashtra’s revenue expenditures for FY23 are forecast at ₹4,27,780 crore compared to capital expenditures of ₹65,201. The revenue expenditure of Uttar Pradesh is estimated at ₹4.56.089 Bn while the capital expenditure is ₹1.23.920 Bn. Gujarat’s revenue expenditure is ₹1,81,000 crore while capital expenditure is ₹35,898 crore. Low investment in fixed assets negates future opportunities for revenue generation, the RBI report says. “Some states like Rajasthan, West Bengal, Punjab and Kerala spend 90% (of their budget) on revenue. This results in poor spend quality, which is reflected in their high revenue spend to capital spend ratio. Although welfare-enhancing, the impact of revenue spending on economic activity only lasts about a year. In contrast, the effect of capital spending is stronger and lasts longer, with the peak effect occurring after two to three years,” the RBI Bulletin said.

Governments’ ability to generate revenue is also being questioned. Data analyzed by happiness india shows that fiscal year 22 tax revenues of 14 states were lower than fiscal year 2020 figures. These are Assam, Bihar, Karnataka, Chhattisgarh, Goa, Haryana, Karnataka, MP, Mizoram, Maharashtra, Odisha, Punjab, Tamil Nadu and West Bengal . In Tamil Nadu, for example, the share of own tax revenue in the total of all states and union territories is estimated to have declined from 8.8% in FY20 to 7.9% in FY22. In Bihar it is said to have fallen from 2.5% to 2.2%. It is estimated that Karnataka experienced a decline from 8.4% in FY20 to 7% in FY22. The RBI study has also pointed to a drop in tax revenues in four of the ten vulnerable states – Madhya Pradesh, Punjab and Kerala – making them tax vulnerable.