Sitharaman’s Budget: Federal justice takes a bigger blow

Since BJP’s mindset is biased in favour of Centre, the pandemic and the recession are only pretexts

The percentage of decrease in transfer of tax resources to the states from Centre is higher compared to the shortfall in some other parameters such as a decline in revenue receipts.

The states in India got ₹ 2,34,222 crore less in their share of gross tax revenues from the Centre in the 2020-21 as per the Revised Estimate (RE) compared to the Budget Estimate (BE). The gross transfers to the states from the Centre in the Revised Estimate of 2020–21 was ₹ 5,49,959 crore compared to the Budget Estimate of Rs.7,84,181 crore.

Total gross resources transfer to states and UTs, including devolution of tax share of gross tax revenue, grants to states fixed by the 15th Finance Commission and Centrally sponsored schemes and other Central schemes like MGNREGS in 2020-21 was ₹ 13,90,666 crore as per Budget Estimates. According to Revised Estimate, it was ₹ 13,13,940 crore. In other words, the states and UTs got ₹ 76,726 crore less. The Budget Estimate for 2021-22 is pegged a shade lower compared to the BE of 2020–21 at ₹ 13,88,502 crore.

(Source: 2021-22 Union Budget documents)


The Union Budget reflects how the devastating pandemic and the recession aggravated by it has disproportionately impacted upon the federal fiscal relations and excessively curtailed resource transfers to states. It is true that in a federal polity both the Centre as well as states will have to share the burden of an unexpected crisis like the pandemic and the routine periodical crisis like the recession which it has deepened. However, Nirmala Sitharaman’s 2021-22 Budget, at a first quick glance, shows that the Centre has dumped more than a fair share of the crisis burden on states. The percentage of decrease in transfer of tax resources to the states from the Centre at around 30% is higher compared to the shortfall in some other parameters like a decline in revenue receipts.

Increased allocation to MGNREGS to states somehow saved the day for states to some extent; otherwise the decline for the states would have been far more drastic. Strangely enough, the states get a raw deal despite the BJP and its allies being in power in 18 of the 28 states. Let us take a quick look at the details.

Centre’s highhandedness

More than half of the total expenditure of the Union government falls under the head of committed expenditure. They include expenditure on grants to states prescribed by the finance commission, interest payments, and the bills on salaries, wages, and pensions etc. It used to be generally assumed that GST compensation also was supposed to fall in this category. However, after the Centre’s highhandedness last year in refusing to transfer the states’ share under the pretext of a drastic fall in revenues due to the lockdown, nobody can be sure. After all, here’s a government that has scant respect for fiscal and budgetary conventions.

The rest of the expenditure items are subject to Centre’s discretion and they comprise more than 40 per cent of the total expenditure. They include all subsidies including on food, fertiliser etc., and other central sector schemes like MGNREGA, PMAY and so on and centrally sponsored schemes (CSS) and transfers to States other than grants fixed by the Finance Commission and GST compensation like NDRF funds similar to that released for fighting Coronavirus. When there is a pressure for a fiscal squeeze, the axe will naturally fall on these latter items and inevitably the states would be at the receiving end under most of these heads.

The consensus reached between the Centre and states on GST was flaunted as the greatest achievement of Indian federalism. It was agreed that the Centre would compensate for the revenue loss of states for a few years due to conversion to GST. But in the face of the first major revenue crisis that immediately followed due to the pandemic, this model showpiece became a symbol of a great betrayal. Throwing the Constitutional norms as well as political decency to the winds, the Centre refused to transfer states’ share.

Tax revenue share of states

Public finance in India is supposed to be determined by a relatively autonomous Finance Commission, but given its very terms of reference, the fiscal space enjoyed by states far outweighs that of the Centre. The gross transfers from the Centre to states worked out only to a meager 5.8% of the GDP in 2019-20 (revised estimates). It was budgeted to be 6.2% of the GDP in 2020-21 (budget estimates), much lower than the 7% it was in 2008-09, 6.7% in 2010-11 and marginally lower than the 6.3% it was in 2016-17 as well as in 2017-18. And these fiscal resources are to be shared between 28 states and 8 Union Territories. Given the existing fiscal and taxation powers, the states — even the developed states — are unable to make up for the reduction in revenue transfers from the Centre by increasing their own tax revenues.

The 14th Finance Commission, however, increased the share of states in the total divisible pool of taxes (which forms a sizable part of the gross revenue transfers) from around one-third to 42% (the 15th Finance Commission, in its interim report, has however reduced it to 41%). But the BJP-ruled Centre has indirectly annulled this increase by raising the share of cesses and surcharges which are not devolved to states. The BJP government has found an ingenious method for depriving the states of their share of tax revenues.

Currently, the cesses and surcharges do not fall under the ambit of tax sharing formula between the Centre and states. The total cesses and surcharges as percentage of gross tax revenues has steadily risen from around 10% in 2010-11 to around 20% in 2019-20 (BE). This means one-fifth of the gross revenue is exempt from the devolution formula to states. In absolute terms, this would run into thousands of crores. States are already demanding that the cesses and surcharges are to be subsumed under devolvable tax income. In fact, in a pre-budget consultation meeting with state finance ministers of Tamil Nadu and Telangana opposed the raising of the share

Despite the already skewed ratio of states’ share in tax revenues, states are left to fend for themselves, but they have no means for that. The federal India is top-heavy, hugely bloated at the top.

Vertical imbalance

A sizable body of federal opinion in the country has all along felt that under the present federal arrangement in India, there is a vertical imbalance in public finances and taxation and tax sharing between the Centre and the states are not as decentralized as the distribution of expenditure responsibilities. Areas like public health and sanitation, agriculture, irrigation, large areas of public works and infrastructure, and basic welfare and human development falling in the State List of the Constitution bestow onerous responsibilities on states.

Even in other crucial social sectors such as education and social security, and vital infrastructure areas such as power generation and road building, falling in the concurrent list, the states need to play their due role. But there is a mismatch between the Constitutionally-assigned fiscal capacities or revenue powers and the expenditure commitments and needs of state governments. Far from playing its role as an instrument of achieving a fair federal fiscal balance, Nirmala Sitharaman’s budget only accentuates this skewed arrangement and bias.

The Union Budget 2021–22 is marked by a farewell to federal justice than by BJP’s own catchword of cooperative federalism. Since the BJP’s mindset is biased in favour of the Centre, the pandemic and the recession are only pretexts.

Also read: 15th FC broke status quo of poor fiscal governance in municipalities

Also read: Budget 2021 bets heavily on a sharp recovery, and therein lies the risk

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