A timely gesture: The Hindu Editorial on the releases of tax devolution dues to States

The Centre’s move to transfer a large chunk of tax devolution dues to States in one go on Wednesday is a pragmatic step that will not only lend impetus to fresh capital spending on the ground but also temporarily soothe tempers amid a fresh round of unease between the Centre and States. Higher than anticipated buoyancy in tax receipts has nudged the Finance Ministry into raising the States’ monthly share of the divisible pool of taxes from about ₹48,000 crore in the first quarter of 2022-23, to ₹58,332.86 crore for August. And surplus cash balances with the exchequer have created room to transfer two months’ dues to States in one go, translating into a significant lump sum of nearly ₹1.17 lakh crore. While the Government had done similar transfers to States, dovetailing and remitting two months’ dues together last year as well, the context is dramatically different for States in this fiscal year. For starters, they no longer have the fallback option of assured revenues from GST Compensation in the five years till June 30, 2022. Even for the GST dues that accrued this year, the Centre frontloaded the release of around ₹87,000 crore to States for April and May, although accruals in the GST Compensation Cess account at the time were just ₹25,000 crore, by dipping into its own coffers. With another ₹35,000-odd crore of GST dues outstanding for June, the overall recompense for States from GST will be around ₹1.22 lakh crore, less than half of the ₹2.5 lakh-odd crore in 2021-22.

There is another uncertainty facing States that has led to extremely tentative behaviour from their treasuries in recent auctions of State development loans — changes in their net borrowing norms. While the Centre had pegged States’ borrowing limit at 3.5% of their Gross State Domestic Product for the year, this ceiling is to be pared in accordance with off-budget debt raised by States since 2020-21. Initial signals that all such off-the-books loans will be deducted from this year’s ceiling had a chilling effect too, not in the least because the paucity of clear data on the extent of such borrowings, make it difficult to anticipate the actual ceiling that the Centre would determine for each State. The Finance Ministry has eased up on this front as well, clarifying that only their off-budget debt for 2021-22 will be adjusted against the ceiling and that too, in a staggered manner between this year and 2025-26. The norms for the ₹1 lakh crore interest-free loans offered to States for discretionary projects this year could also be reviewed to help it gain greater traction with State governments. Taken together, these steps should help States, which expressed concerns about dwindling revenues at the recent NITI Aayog governing council meet, back the effort to rev up the economy with a capex spree. Friction points between the Centre and States will persist with fluctuating intensities, but a rising economic tide will ease constraints for both.