Financial Vulnerability of Small States

20 Jul 2023

Context: 

Small States in India continue to rely heavily on the Union government for their revenue.States being discussed as small states are: Arunachal Pradesh, Sikkim, Manipur, Mizoram, Meghalaya, Nagaland, Tripura, Himachal Pradesh and  Goa.

Highlights:

  • High Reliance on Union Government: Share of Union transfers in the revenue receipts of all States combined hovers between 40% and 50%.

    • However, Union’s share in all the  other small States’ revenue receipts is more than 60% (2022-23 Budget Estimates) except in Goa.
  • Limited capacity of small States to raise their own taxes: Distinctive characteristics of smaller states like border state, lack of industrial development and poor access to ports etc, restrict economic activity and consequently make it challenging to generate tax revenue. 
    • It results in a heavy dependence on the Union government, exposing the States as well as the Union Government to various vulnerabilities.
  • States rely on the Union governments’ political goodwill. A sudden decline in Union transfers can adversely affect the States’ expenditures.
    • Increasing disagreements concerning resource sharing (for example, GST compensation) between the Union and the States. 
  • Lack of Flexibility: High dependence on the Union might imply less fiscal freedom for the States. 
    • A significant portion of the funds transferred by the Union is tied to specific purposes, limiting the States’ flexibility. 
  • Lack of Delivery: Lack of their own revenues can lead to weakened State capacity, affecting the delivery of social, economic, and general services. 
    • This situation becomes even more critical as many small States share international borders. 
    • The developmental concerns in these States can have implications for national security.

Way Forward

  • Exploring New Avenues: States must prioritize identifying new sources of tax revenue or explore ways to leverage existing ones more effectively.
    • Ex: Manipur liquor prohibition policies have led to substantial revenue losses without significantly reducing the negative consequences of drinking. 
  • Improve the tax administration in the States:  States can boost their collection of non-tax revenues by revising the existing charges and rates for various services and enhancing administrative revenue collection efficiency.
  • States must consider revitalizing and corporatising loss making enterprises to improve their revenue performance. 
    • Some States such as Mizoram have closed down loss-making public sector enterprises, recognising that these entities are a liability.
    • It could lead to higher resource mobilisation and reduce the deviation of actual from budgeted tax revenues. 
Sources of  revenue receipts for a State

  • Transfers from the Union government: State’s share in Union taxes including income tax, corporation tax, and grants.
  • State’s Own Revenues
    • Tax Sources: The State can raise its own taxes (own tax revenue or OTR) from professions, property, commodities, etc. 
    • Non-Tax Sources: It can mobilise non-tax revenue (own non-tax revenue or ONTR) from social and economic services, profits, dividends, etc.

India Constitution Provision for Transfer of Funds

  • Finance Commission under Article-280: It is a constitutional body formed every five years to give suggestions on centre-state financial relations.
  • Article 275: Grants from the Union to certain States
  • Article 282: Centre upon its own discretion can grant aid to certain States for the public purpose. 

News Source: The Hindu

Archive Calendar

Mon Tue Wed Thu Fri Sat Sun
 123
45678910
11121314151617
18192021222324
25262728293031

by month

SRIJAN MAINS

Need help preparing for UPSC or State PSCs?

Connect with our experts to get free counselling & start preparing

Aiming for UPSC?

Download Our App

      
Quick Revise Now !
AVAILABLE FOR DOWNLOAD SOON
UDAAN PRELIMS WALLAH
Comprehensive coverage with a concise format
Integration of PYQ within the booklet
Designed as per recent trends of Prelims questions
हिंदी में भी उपलब्ध
Quick Revise Now !
UDAAN PRELIMS WALLAH
Comprehensive coverage with a concise format
Integration of PYQ within the booklet
Designed as per recent trends of Prelims questions
हिंदी में भी उपलब्ध

<div class="new-fform">






    </div>

    Subscribe our Newsletter
    Sign up now for our exclusive newsletter and be the first to know about our latest Initiatives, Quality Content, and much more.
    *Promise! We won't spam you.
    Yes! I want to Subscribe.