Context:
States are increasingly relying on State Development Loans (SDLs) instead of tax devolution, raising concerns about fiscal sustainability and erosion of federal balance.
Key Highlights:
- Growing Dependence on SDLs
- SDLs form:
- 35% of Tamil Nadu’s revenue.
- 26% of Maharashtra’s revenue (2024-25).
- West Bengal: 47.7% revenue from central devolution, yet high borrowing.
- 15th Finance Commission Formula
- States’ share fixed at 41% of divisible pool.
- However, rising cesses and surcharges (outside divisible pool) reduce effective transfers.
- Post-GST Impact
- GST (2017) weakened link between tax effort and fiscal reward.
- Industrial states feel disadvantaged.
- Borrowing for Revenue Expenditure
- SDLs funding:
- Pensions.
- Welfare schemes.
- Health insurance.
Relevant Prelims Points:
- State Development Loans (SDLs): Bonds issued by States.
- Divisible Pool: Taxes shared as per Finance Commission.
- Finance Commission (Article 280).
- Difference between:
- Revenue vs Capital expenditure.
- Fiscal deficit vs Revenue deficit.
Relevant Mains Points:
- Fiscal Federalism Concerns
- Shrinking effective devolution.
- Increased vertical fiscal imbalance.
- Hyper-centralisation of resources.
- Macroeconomic Risks
- Rising debt-to-GSDP ratios.
- Crowding out private investment.
- Reduced fiscal space for infrastructure.
- Structural Issues
- Growing share of cesses and surcharges.
- Weak incentive for tax effort post-GST.
- Governance Implications
- Reduced fiscal autonomy.
- Greater dependence on market borrowings.
Way Forward:
- Include cesses and surcharges in divisible pool.
- Rework horizontal devolution criteria.
- Strengthen fiscal responsibility frameworks.
- Ensure borrowings are directed towards capital creation.
UPSC Relevance:
- GS 2: Federalism, Finance Commission.
- GS 3: Public debt, fiscal sustainability.
Prelims: SDLs, divisible pool, GST impact.