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Despite High Tax Transfers In Union Budget, States Face Fiscal Challenges: Report

New Delhi [India]: Despite receiving substantial tax transfers from the Centre, the financial health of Indian states remains weak, according to a recent State Bank of India (SBI) report.

The report points to a decline in fiscal stability across most states, with some exceptions, and highlights regional disparities in states’ ability to manage their economies effectively.

Key Findings of the SBI Report

The report was released amid ongoing debates over the allocation of financial resources between the Centre and states. It reveals that a significant 59.9% of the Centre’s gross tax revenue is transferred to state governments.

This transfer is distributed as follows:

  • 33.3% from the divisible pool of central taxes
  • 5.4% under various schemes, including grants and loans for externally aided projects, disaster relief assistance, and capital expenditure loans
  • 19.9% in the form of grants for rural and urban local bodies, State Disaster Response Fund (SDRF), and revenue deficit grants

Despite these substantial transfers, the fiscal health of states has continued to decline, highlighting a need for better financial management.

Total Financial Transfers from the Centre to States

According to the report, the total financial transfer from the Centre to the states stands at ₹25.6 lakh crore:

  • ₹14.2 lakh crore comes from the divisible pool of taxes
  • ₹12.4 lakh crore is allocated from the consolidated fund of the Centre

These transfers are designed to support state-level development and welfare initiatives, but many states still struggle with fiscal challenges.

Recommendations for Better Financial Management

The report suggests that states need to optimize their expenditures and improve financial autonomy at lower levels of government to ensure better public service delivery.

It recommends:

  1. Prioritizing expenditures to ensure funds are allocated efficiently
  2. Greater financial devolution at lower levels of government to enhance public service delivery
  3. Better fiscal management to ensure long-term economic stability

The report concludes that while tax transfers play a crucial role in supporting state finances, sustainable economic health depends on sound financial governance by the states themselves.

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