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. 

News Source: The Hindu