Some of the financial parameters of Punjab, a highly indebted state, for instance, are identical to Sri Lanka’s. Its debt-to-GDP ratio is now the highest in the country at 53.3%, in contrast to the ceiling of 20%.

The new Punjab chief minister Bhagwant Mann, however, had promised a fresh bouquet of freebies in the run-up to his party’s election to power earlier this year. This included Rs1,000 a month for every woman aged over 18 and 300 units of free electricity for homes. Together, these will account for a revenue outgo of around Rs 17,000 crores a year.

Ironically, after gaining power, Mann sought a relief package of Rs 1 lakh crore from the central government.

Similarly, in West Bengal, agriculture-related schemes and various other freebies have drained the government’s finances. Its debt constitutes more than a third of its state GDP, while its tax revenue has often accounted for less than a third of its total annual receipts in recent years.

Likewise, Rajasthan and Chhattisgarh have reinstated discarded pension schemes, with few new sources of income to cover for them.

Others like Jammu and Kashmir, Chhattisgarh, Madhya Pradesh, and Himachal Pradesh had relatively higher fiscal deficits in 2021-22, indicating their overall annual borrowing requirements.

The problem of states’ low revenues

While states are entitled to a portion of central revenues and the goods and services tax, their independent sources of income are limited to excise on alcohol, value-added tax on petrol, receipts from property-sale, and motor vehicle registration.

Yet, they must spend on health, social welfare, and other critical areas. Expenditure in these segments has increased in recent years, especially during the pandemic. Many of the states, thus, have been forced to give fiscal prudence a pass, ballooning their overall debt burden to a 15-year high.

Things worsened in 2020 after the central government itself failed to share GST revenue with the states. This was a first since the tax’s inception in 2017 and was precipitated by the pandemic.

It’s about time now that various levels of government brainstormed to find a way out of the states’ financial quandary. India, after all, is a union of states.

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