Source: Ideas and Institutions Issue #25
Analysis
Changing Patterns in the Fiscal Transfers from the Union Government to Sub-national Governments
Transfers from the union government to states and union territories (and to local bodies) have been a matter of much controversy in recent years. When the fifteenth Finance Commission was constituted, it seemed that the commission’s terms of reference might induce a reduction in devolution and other transfers. This did not happen, as the commission basically kept the devolution at the same level, only reducing it to account for the bifurcation of Jammu and Kashmir into union territories. Another controversy that has been around for a while is about the union government keeping the cesses and surcharges at high levels, especially those levied on petroleum products, so that the divisible pool of taxes is significantly smaller than the gross tax revenue. This has led to lower devolution to the states. So, the transfers have been keenly observed from one year to another. What does the union budget 2023-24 say about this?
In this essay, we consider all types of transfers—devolution, (untied and tied) grants, and loans–and describe the trends since 2016-17—the Indian economy has been slowing down since then, with GDP growth decelerating from 8.26 percent in 2016-17 to 3.74 percent in 2019-20. Following the implementation of the fourteenth Finance Commission’s recommendations, the devolution of union government’s tax revenues to states rose from 27.14 percent in 2014-15 to 34.77 percent of gross tax revenues in 2015-16. The non-devolution transfers fell from 27.1 percent of gross tax revenue in 2014-15 to 22.5 percent in 2015-16 to partly offset this rise in devolution. So, the overall transfers rose from 54.24 percent to 57.27 percent of gross tax revenue.
The states’ share in centre’s taxes was 35.4 percent of the gross tax revenue in 2016-17, 35.1 percent in 2017-18, and 36.6 percent in 2018-19. The other transfers to states were 22 percent of gross tax revenue in 2016-17, 21.5 percent in 2017-18, and 20.8 percent in 2018-19. So, the total transfers, as a percentage gross tax collection, were stable at around 57 percent of the gross tax revenue of union government.
However, as the gross tax revenue of the union government fell from 11.23 percent in 2017-18 and 11 percent in 2018-19 to 10 percent of GDP in 2019-20, the fiscal situation became quite challenging for the union government. This was likely due to the sharp decline in GDP growth rate from 6.45 percent in 2018-19 to 3.74 percent in 2019-20. That year, the states also saw a decline in their tax revenues, but it was not as sharp as it was for the union government. The states’ tax revenue collection fell from 6.36 of GDP in 2018-19 to 6.1 percent in 2019-20.
One of the many ways in which the union government responded to the situation was by squeezing the states in devolution. This was done by increasing the cesses and surcharges. The states’ share in the union government’s gross tax revenue fell to 32.4 percent. However, the other transfers rose to 24.6 percent of gross tax revenue. The main components of non-devolution transfers that saw an increase were: transfers to urban local bodies recommended by finance commission and transfers to Jammu and Kashmir after the reorganization of the state in union territories. So, even though devolution fell, the total transfers fell only marginally as a percentage of gross tax revenue.
The pandemic pushed India’s public finances further into a crisis, as the revenue receipts fell and the demands for additional expenditure rose. All levels of government needed more resources, but it became more difficult to raise them. Although the states were allowed to increase their deficits, the union government did much of the additional borrowing to finance the fiscal support during the crisis. In 2020-21, the union government fiscal deficit was 9.2 percent of GDP while that of states was 4.1 percent of GDP.
Facing a fiscal crunch, the union government intensified its strategy of raising taxes from duties on petroleum products. So, even though collection under most other taxes fell, the increase in excise duty collection pushed the union government’s gross tax revenue up to 10.24 percent of GDP in 2020-21. Since this was done by raising cesses, the states did not get a share of these resources. Further, the devolution to states was reduced by 1 percentage point to account for the transformation of Jammu and Kashmir. So, the states’ share in the gross tax revenue of union government fell to 29.3 percent (about 30.9 percent if you include the transfers to Jammu and Kashmir and Ladakh).
The other transfers rose to a whopping 35.8 percent of gross tax revenue of union government in 2020-21. However, in 2020-21, two new components were added that should not be included while making comparisons with previous years. First, back to back loans were given to state governments in lieu of GST compensation shortfall. These loans were given in 2021-22 as well, but not after that. Second, the union government has made 50-year interest free loans to state governments for capital expenditure to aid in the economic recovery. If we don’t include these, the non-devolution transfers still added up to 29.74 percent of gross tax revenue of the union government. So, the increase in the other transfers, even after excluding these loans, more than offset the decline in devolution, even though the nature of these transfers is obviously very different.
In 2021-22, the union government’s gross tax revenue recovered to 11.45 percent of GDP. Devolution to states rose to 33.16 percent of gross tax revenue of the union government (34.6 percent, if we include transfers to Ladakh and J&K). In that year, excluding loans in lieu of GST compensation shortfall and loans for capital expenditure, non-devolution transfers added up to 23.8 percent of union government’s gross tax revenue. If we include the loans in lieu of GST compensation shortfall and loans for capital expenditure, this adds up to 29.8 percent of gross tax revenue. So, the total transfers, including those to J&K and Ladakh, were about 58.4 percent of gross tax revenue. Including the two types of special loans, they were 64.4 percent of gross tax revenue. The increase in devolution seemed to suggest that the pre-2019-20 pattern of transfers might eventually be restored.
However, the latest budget documents show that in 2022-23, based on the revised estimates, the devolution again fell to only 30.1 percent of gross tax revenue (31.8 percent including transfers to Ladakh and J&K) - the lowest since the implementation of the fourteenth Finance Commission’s recommendations. The other transfers (excluding loans for capital expenditure) were at 23.6 percent of gross tax revenue. Including the loans for capital expenditure, the non-devolution transfers were 26.1 percent of gross tax revenue. So, the total transfers were 55.4 percent of gross tax revenue, or 57.9 percent if we include the special loans for capital expenditure.
Now, the budget for 2023-24 has envisaged devolution of 30.4 percent of gross tax revenue (31.6 percent including transfers to J&K and Ladakh) and for other transfers (excluding the loans for capital expenditure), 21.2 percent of gross tax revenue. So, the total transfers will be only about 52.8 percent of gross tax revenues. This would be lowest total transfers as a percentage of the union government’s gross tax revenue since the implementation of the fourteenth Finance Commission’s recommendations. Adding the loans for capital expenditure, which have been increased to Rs. 1.3 lakh crore, takes the total transfers to 56.8 percent of gross tax revenue.
This brief overview of the changing patterns of transfers suggests that major changes are afoot in the regime of fiscal transfers from the union government to sub-national governments. The consequences of these changes need to be studied carefully.
Note: All calculations are based on the data from the Union Budget documents.
—By Suyash Rai
Review
Rent, Modernity, and the Transformation of Delhi’s villages
When land and real estate markets start getting disrupted due to state action, the character of the affected communities, their communal linkages, orientation towards land and property, and their outlook towards modernity change inexorably. In "Properties of Rent: Community, Capital and Politics in Globalizing Delhi" (2022), Sushmita Pati pens a multi-faceted sociological study of the contemporary changes in the real estate and housing market in the urban villages of Delhi.
Pati’s field of study is two of Delhi’s urban villages—Munirka and Shahpur Jat. Starting in 1959, land in these urban villages was acquired by the Delhi Development Authority. While the agricultural lands within the villages were acquired, the lal dora or residential areas were left in order to simplify and hasten the acquisition. One consequence of this was that these lal dora areas did not have to subscribe to the city’s master plans. Pati notes that over the years, these parts of the villages have come to resemble unauthorized colonies because of the chaotic, unplanned construction within them. In addition, the slow pace of development in the acquired areas led to encroachment and illegal construction.
Pati looks at these processes from a sociological lens, using the idea of “rent” to understand the different dynamics related to land, built property, caste, and most importantly, how kinship relationships have changed due to the unavoidable interactions of the local residents with the larger city of Delhi and their participation in the city’s economic growth.
Pati’s introductory chapters focus on the history of land acquisition and the negotiations, land grabbing, and encroachments within these two urban villages. She describes how land acquisition as a process was marked by unfairness, delays, and disparate outcomes for different families in both Munirka and Shahpur Jat. The compensation was not uniform, the state assessed compensation by refusing to acknowledge the market value, and some common land like wastelands was acquired without any compensation. Pati persuasively argues that seen from this perspective, the difference between state acquisition and illegal encroachments begins to blur.
The book’s second chapter describes the consequences of these changes on the dominant Jat community in these villages. They were at once both victims coping with drastic changes to their way of life and making as well as entrepreneurial agents speculating on the newly commodified land markets within these villages. This seeming contradiction is a consistent theme within the book. Many villagers became landlords and used rental income for subsistence and growth. As is true for all risk-taking, while some benefitted, others lost.
The two villages also developed unevenly. Their spatial location in the city and developments in the surrounding areas had a significant impact on how these two villages developed. Pati notes that Munirka has developed as a lower-income settlement and is home to a large population of migrant workers. In contrast, Shahpur Jat, which is located close to the upscale neighborhood of Hauz Khas, has emerged as a hub for boutiques and restaurants on the one hand and garment manufacturing on the other.
Pati highlights that these neighborhoods represent two different trajectories of urban development in Delhi. According to her, Munirka has been subject to neglect by the state. Shahpur Jat, on the other hand, has been the focus of urban regeneration efforts, and its transformation has been driven by global capital. In addition, Shahpur Jat received significant attention because the Asian Games Village of 1982 was constructed right next to it. This was followed by economic liberalization in 1990s, which provided a flip to land prices and private business. While in Munirka, this resulted in an increased demand for low-income housing for migrants, it took the shape of demand for affordable commercial real estate in Shahpur Jat.
Pati emphasizes the role of caste and kinship linkages in the development trajectories of these two villages. Her description is a nuanced portrayal of how these linkages have, on the one hand, transformed and weakened in their confrontation with modernity and markets, and on the other, been mechanisms through which dominant groups in these villages (mostly Jats) have gained and retained control over the local property markets. In her telling, traditional decision-making bodies like khap panchayats have now slowly transformed into entities more legible to the state, like RWAs. These bodies, now with official recognition, can “sometimes work as a village development committee, or an organisation of landlords, [or] as an organisation of struggling entrepreneurs. . .”
Through these mechanisms, dominant groups within these villages are able to maintain control over the rental market and also resist pressures from tenants to demand better housing and services. This has consequences for tenants, who are unable to complain about high electricity charges or sudden increases in rent. In addition, while these villages cater to the housing needs of immigrants, the relationships of the property-owning groups with their tenants are complex. On the one hand, landlords are forced to reconcile with different cultural ethos of tenants from the North-Eastern states of India, from African countries, and those with LGBTQI± identities. On the other hand, this reconciliation is superficial and prone to acts of overt and covert discrimination and harassment.
Pati's comparison of Munirka and Shahpur Jat provides a nuanced perspective on the complex processes of urbanization in Delhi’s urban villages and highlights the social and political implications of these transformations. However, it is debatable how far the use of “rent” as a sociological perspective is relevant for studying these transformations.
Others analyses of Delhi’s urban villages (examples here and here) have described similar transformations but without using the idea of “rent” as a prism. It is true that control over rent in these villages is emblematic of social and economic control. But at the same time, as Pati herself demonstrates, this control is heavily contested, often superficial, and prone to subversion by individual and group entrepreneurialism.
In addition, Pati’s analysis argues that it is the role of neoliberal policies that have shaped this dynamic of dispossession, contestation, and transformation, which can be uniquely understood through the perspective of rent. This is disputable. Pati’s analysis equally highlights the high-handed and arbitrary injustice of land acquisition policies. One may argue, just as strongly, that the sociological changes in Pati’s study are a product of high-modernist statism. As Anthony de Jasay has argued in his frighteningly persuasive work “The State” (1998), the state can be simultaneously representative and autonomous. From this perspective, the state is not only an instrument of ideological agendas such as neoliberalism but also an autonomous agent that uses coercion to dispossess. Pati’s account of the capture of some common land resources in these villages by government bodies illustrates this perfectly.
From this perspective, one may also seek to understand the effect of coercive developmental mechanisms on the social changes that Pati studies. Socialism or neoliberalism and the instruments used by the state to further these ideas have remained the same. The properties of such statism have as much explanatory power in understanding transformations in these urban villages as the properties of rent.
—By Anirudh Burman
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