Directorate of Economics and Statistics recently released the report on Telangana Economy, with details on Gross State Domestic Product (GSDP), Gross District Domestic Product, Per Capita Income and other economic parameters of the State.
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There is wide disparity among the districts in Telangana in terms of Gross State Domestic Product (GSDP) and Per Capita Income (PCI).

Per Capita Income

A comparison of the Gross District Domestic Product (GDDP) and PCI reveals the sharp differences among the districts in the two vital economic parameters pertaining to their financial health. Rangareddy district has the highest PCI of ₹9.46 lakh at current prices when compared with ₹1.8 lakh of Vikarabad. Hyderabad district has the next highest PCI of ₹4.94 lakh and Sangareddy ₹3.22 lakh while per capita income of all other districts is ranging between ₹1.8 lakh to ₹2.9 lakh.

GDDP

In terms of GDDP too, Rangareddy is at the top with ₹2.83 lakh crore as compared with Mulugu district which has GDDP of ₹6,914 crore. Except for Hyderabad (₹2.28 lakh crore) and Medchal-Malkajgiri (₹88,867 crore), the GDDP of all other districts is below ₹61,000 crore.

GSDP

These figures are revealed in the provisional estimates of 2023-24 of the State’s economy released by the Directorate of Economics and Statistics recently. According to the report, the GSDP of the State increased from ₹13.11 lakh crore in 2022-23 to ₹15.01 lakh crore in 2023-24 (preliminary estimates).

The economic growth rate however is estimated to decline from 16.7% to 14.5% during the period. Telangana is better placed in economic growth rate as compared with the national GDP growth which is expected to decline from 14.2% to 9.6%. “The decline in growth rate at the national level is much sharper than that in Telangana. In comparison to India GDP growth rate, Telangana State growth rate is higher by 4.9 points,” the report said.

The same is the case with PCI which is estimated at ₹3.56 lakh in 2023-24 as against ₹3.12 lakh in the previous year. The growth rate however reflected a decrease from 16.2% in 2022-23 to 14.1% in 2023-24. The national PCI during the same period is expected to increase from ₹1.69 lakh to ₹1.84 lakh, but the decline in growth rate reflected a sharp decline from 12.3% in 2022-23 to 8.7% in 2023-24.

Small States must prioritise raising their own revenue to reduce their dependency on the Union government

The fiscal situation of India’s States has garnered significant attention in recent times. Despite ample data on State finances, most of the analysis is centred around larger States. There needs to be more discussion on the fiscal position of small States (i.e. States with a population of less than 1 crore). Most of these small States have distinctive characteristics that limit revenue mobilisation. Recognising these disabilities, the Constitution has provided mechanisms to address them. But these States continue to rely heavily on the Union government for revenue. This dependence creates vulnerabilities for the States as well as the Union.

The total revenue receipts for a State constitute transfers from the Union government such as the State’s share in Union taxes including income tax, corporation tax, and grants, and the State’s own revenues from tax and non-tax sources. The State can raise its own taxes (own tax revenue or OTR) from professions, property, commodities, etc. It can mobilise non-tax revenue (own non-tax revenue or ONTR) from social and economic services, profits, dividends, etc.

The revenue receipts of each of the small States have increased. For six of the nine States, they have grown faster than the gross state domestic product (GSDP). But these increases are primarily due to Union transfers rather than States’ own revenues. In other words, dependence on the Union has not decreased. For three States — Mizoram, Sikkim and Tripura — the revenue receipts have grown slower than the State GSDP implying limited fiscal space to operate.

While the share of Union transfers in the revenue receipts of all States combined hovers between 40% and 50%, the ratio is quite large for the small States. Except for Goa, the Union’s share in all the other small States’ revenue receipts is more than 60% (2022-23 Budget Estimates). For five States, the share is around 90% (Chart 1).

Chart 1 | The chart shows the current transfers to the revenue receipts ratio. The figures are in %.

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The States’ economies have grown over time, but this has not necessarily translated into higher revenue mobilisation capacities. It is best reflected in the continued dominance (2014-2023) of current transfers in the revenue receipts.

The capacity of small States to raise their own taxes continues to be limited. Eight out of nine States fare worse than the all-State average OTR-GSDP ratio (Chart 2).

Chart 2 | The chart shows the own tax revenue (OTR) to gross state domestic product (GSDP). The figures are in %.

The distinctive characteristics of these States restrict economic activity and consequently make it challenging to generate tax revenue. However, what is particularly concerning is that the States’ ability to mobilise taxes has yet to show significant improvement over time. At best, it has fluctuated, with several States experiencing a peak in their OTR-GSDP ratio around 2017-18. The small States do relatively better in mobilising their ONTR, with six States performing better than the all-State average. However, States such as Manipur, Tripura, and Nagaland have consistently struggled in terms of their ONTR-GSDP ratio, performing poorly in comparison.

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The limited capacity of small States to generate their own revenues results in a heavy dependence on the Union government, exposing the States to various vulnerabilities. First, the States rely on the Union governments’ political goodwill. A sudden decline in Union transfers can adversely affect the States’ expenditures. In the last few years, there have been increasing disagreements concerning resource sharing (for example, GST compensation) between the Union and the States. Second, high dependence on the Union might imply less fiscal freedom for the States. A significant portion of the funds transferred by the Union is tied to specific purposes, limiting the States’ flexibility. In some instances, given their existing revenue situation, the States might be unable to match the transfers. Third, the lack of their own revenues can lead to weakened State capacity, affecting the delivery of social, economic, and general services. This situation becomes even more critical as many small States share international borders. The developmental concerns in these States can have implications for national security.

To mitigate these vulnerabilities, the States must prioritise identifying new sources of tax revenue or explore ways to leverage existing ones more effectively. A study by Manipur University evaluating the State finances of Manipur identified how its liquor prohibition policies have led to substantial revenue losses without significantly reducing the negative consequences of drinking. Another study of Arunachal Pradesh’s finances identified the potential to generate more revenue from transactions on land and sales tax.

Additionally, there is a need to improve the tax administration in the States. Not only will this lead to higher resource mobilisation, but it will also reduce the deviation of actual from budgeted tax revenues. The States can boost their collection of non-tax revenues by revising the existing charges and rates for various services and enhancing administrative revenue collection efficiency. Many state public sector enterprises in these States are not in good shape and do not contribute enough revenue. The States must consider revitalising and corporatising these enterprises to improve their revenue performance. Some States such as Mizoram have closed down loss-making public sector enterprises, recognising that these entities are a liability.

Sarthak Pradhan is an Assistant Professor at the Takshashila Institution. The research for this article was made possible by The International Centre Goa Research Grants. Email ID: sarthak@takshashila.org.in

Source: “State Finances: A Study of Budgets”, Reserve Bank of India

Also read: Data | Friction over revenue sharing formula: Why some States get more money from Centre

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