Hindi English Translation || Editorial || Devolution, not debt: On the rapid expansion of State Development Loans

Devolution, not debt: On the rapid expansion of State Development Loans

Cesses (उपकर) and surcharges (अधिभार) levied by Centre must be in divisible pool

While the Union Budget is keenly (With close attention or strong interest) tracked by States to assess (आकलन करना, मूल्यांकन करना) their share in overall Central tax devolution (हस्तांतरण, विकेंद्रीकरण), it is becoming increasingly clear that this revenue stream no longer plays the stabilising role it once did in State finances. The evidence lies in the rapid expansion of State Development Loans (SDLs), which have emerged (उभरा, सामने आया) as a key (Very important or central) financing instrument for States’ day-to-day spending needs. In 2024-25 (Revised Estimates), SDLs amounted to (बराबर होना, कुल मिलाकर होना) about 35% of Tamil Nadu’s total revenue receipts and nearly 26% of Maharashtra’s — levels that would have been considered fiscally exceptional (असाधारण, विशिष्ट) a decade ago. This shift gathered pace after 2020-21, when the COVID-19 pandemic delivered a severe (Extremely serious or intense) economic shock (झटका, आघात) and Central devolution proved inadequate (अपर्याप्त). This dependence on borrowing has not reversed since. Instead, States are increasingly relying on SDLs; borrowings by profit-making State PSUs and Special Purpose Vehicles are done to finance even routine (नियमित, रोज़मर्रा का) revenue expenditure. This has happened despite the 15th Finance Commission fixing States’ share at 41% of the divisible pool, as the effective flow of resources has been eroded (Gradually weakened or reduced) by the growing use of cesses and surcharges, which lie outside the divisible pool. The problem is acute for industrialised States with a large indirect tax base. Since the introduction of GST in 2017, a substantial share of these revenues is collected by the Centre and redistributed through a formula that often weakens the fiscal link between tax effort and reward. Consequently, welfare commitments — pensions for the elderly and retired employees and mass health insurance schemes for the poor — are increasingly being funded through domestic borrowing. This limits the availability of funds for public capital expenditure and private investment, which is essential to sustain growth.

A comparison of borrowing patterns over the past five years across Punjab, Uttar Pradesh, Tamil Nadu, Maharashtra and West Bengal underlines this trend. West Bengal, which is structurally dependent on Central devolution — averaging about 47.7% of its revenue receipts over the last five years — continued to borrow heavily from the domestic market. SDLs constituted roughly 35% of the State’s revenues on average during this period, even as nominal tax devolution rose. This points to a steady erosion of States’ fiscal autonomy, with potentially serious macroeconomic consequences as debt-to-GSDP ratios rise while assured revenue streams weaken. If debt, rather than devolution, becomes the primary shock absorber in India’s federal system, fiscal sustainability itself comes under strain. India needs higher effective devolution, and a reworking of horizontal devolution criteria to give greater weight to tax effort and efficiency. Cesses and surcharges must be brought into the divisible pool.

Courtesy: The Hindu

Important Word List With Meaning

1.Devolution (Noun)

Hindi Meaning – हस्तांतरण, विकेंद्रीकरण
English Meaning – Transfer of tax revenue or financial power from the Centre to States.

2.Cesses (Noun)

Hindi Meaning – उपकर
English Meaning – Special taxes levied for specific purposes and not shared with States.

3.Surcharges (Noun)

Hindi Meaning – अधिभार
English Meaning – Extra taxes added on top of existing taxes.

4.Assess (Verb)

Hindi Meaning – आकलन करना, मूल्यांकन करना
English Meaning – Evaluate or calculate carefully.

5.Emerged (Verb)

Hindi Meaning – उभरा, सामने आया
English Meaning – Came into existence or became noticeable.