The current state of India’s fiscal federalism is significantly detrimental to the states. The system needs to be reoriented to foster a competitive environment across the country, not just within individual states.
The recent Union Budget 2024 was expected to set a comprehensive five-year economic agenda for the country’s overall growth. In the budget, unique packages were granted to Bihar (Rs 26,000 crore) and Andhra Pradesh (Rs 15,000 crore) in exchange for political support, resulting in an even wider fiscal imbalance. It is essential to ask why a similar approach has not yet been taken to address the economic growth of other financially distressed states. For example, Punjab, as a landlocked border state facing locational disadvantages, requires a fair platform to compete on an equal footing.
Once a prosperous and progressive state, Punjab now grapples with significant unchecked unemployment. This stems from a distressed farming sector and an imbalanced industrial base dominated by small and medium-sized enterprises (SMEs), which comprise 99.7 per cent of the state’s industries. Punjab accounts for only 5 per cent of India’s industrial units, with a sluggish 3.6 per cent Compound Annual Growth Rate (CAGR) in the industrial sector over the past five fiscal years, ranking 12th nationally. In contrast, neighbouring Haryana boasts a 5.9 per cent growth rate.
Punjab, which ranked first in GDP in 1981 and fourth in 2004, has experienced a sharp decline. In fiscal year 2023-24, with a GDP of Rs 6.98 lakh crore, it ranked 16th. Comparatively, Haryana’s GDP stands at Rs 11.20 lakh crore, securing its 12th place ranking. Notably, Bihar, once part of the economically challenged “BIMARU” states (Bihar, Madhya Pradesh, Rajasthan, and Uttar Pradesh), now boasts a 10.6 per cent growth rate and a GDP of Rs 8.59 lakh crore in FY 2023-24.
Allowing lopsided economic development in a sensitive state like Punjab will have serious repercussions. Failing to ensure holistic development will ultimately lead to accusations of inefficiency in managing human resources. Unemployment exacerbates various issues in distressed areas, including mental health, crime, and drug abuse. Substantial evidence links drug abuse and law and order problems directly to unemployment. These issues must be addressed assertively to ensure the overall progress and well-being of Punjab.
Economic distress in Punjab has led to unemployment and a significant migration of its human resources to Canada, which has created a breeding ground for radicals and anti-Indian Khalistani extremist activities on Canadian soil. It is a globalised challenge that must be addressed promptly. Secondly, the Pakistani border has been adversely affecting Punjab’s economy. This, along with illegal arms supply and drug-related terrorism, has severely impacted Punjab’s social fabric and law and order. The Central government has not adequately compensated Punjab for its unique challenges as compared to other states.
The revenue-sharing disparity is a pressing issue causing significant, alarming socio-economic distress in Punjab. The state receives only 51 paise for every rupee it contributes to the Centre’s tax pool, compared to states like Bihar, which receive Rs 1.20. This highlights the urgent need for equitable revenue sharing to ensure Punjab’s socio-economic well-being.
Currently, Punjab’s contribution to the country’s tax revenue stands at approximately 3 per cent, yet it receives only 1.8 per cent of the divisible pool of taxes allocated by the Fifteenth Finance Commission. It is concerning that Punjab received only 1.8 per cent of the Rs 8,16,649 crore distributed by the Centre to the states during 2022-23. In contrast, the large areas and population figures of Uttar Pradesh and Bihar provide them with additional leverage from the central tax pool. Uttar Pradesh received the highest share at 18 per cent (Rs 1,46,525 crore), while Bihar received the second-highest share of 10 per cent. This discrepancy underscores why Punjab and other states argue that they should receive a fair share of funds despite contributing more to the exchequer.
During the fiscal year 2022-23, Punjab contributed Rs 32,800 crore to the central tax fund, which includes CGST, income tax, corporation tax, wealth tax, union excise duty, customs, and service tax. However, the state received only Rs 14,756 crore in return. Punjab has raised this issue with the Sixteenth Finance Commission, arguing that it deserves a fairer share of central tax revenue.
The Finance Commission recommends the distribution of tax revenues between the Centre and the states. Despite recommendations to allocate 42 per cent and 41 per cent of net tax revenue to states, their share of gross tax revenue fell to 35 per cent in 2015-16 and 30 per cent by 2023-24. For 2024-25, the Gross Tax Revenue (GTR) is projected to grow at 11.7 per cent, raising concerns about whether this growth will be adequate to meet state fiscal needs.
The introduction of the Goods and Services Tax (GST) Act has had significant and varying consequences for fiscal federalism. It has granted the Centre more extensive taxation powers, altering the budget landscape and transforming budgetary federalism in the country. While GST has led to revenue growth, it has also restricted the financial autonomy of the states.
In a recent memorandum submitted to the Sixteenth Finance Commission chairman, Punjab highlighted the financial loss incurred due to the introduction of GST. The state estimated it would have earned more than Rs 45,000 crore with VAT compared to the budgeted GST revenue of Rs 25,750 crore for FY 2024-25. This gap is expected to widen, with a projected difference of Rs 95,000 crore under VAT versus Rs 47,000 crore under GST by 2030-31.
The Way Forward
In the current fiscal federalism framework, it is crucial to adopt a comprehensive and inclusive approach to budgetary prudence, local employment generation, and social harmony, regardless of demographic and political differences. This includes devolving more fiscal powers to the states, thereby enhancing their flexibility in revenue generation, expenditure planning, and borrowing limits.
Reforms are necessary to address imbalances in the revenue transfer system. An amendment to the Finance Act is still pending, which is essential for establishing fairness and accountability in managing the resource imbalances between the Centre and the states. These imbalances have led to growing regional tensions. Ultimately, a fair, competitive, and effective fiscal federalism is essential to ensure that resources are utilised to improve services and infrastructure for citizens.
The Author is Vice-Chairman of Sonalika ITL Group, Vice-Chairman (Cabinet minister rank) of the Punjab Economic Policy and Planning Board, Chairman of ASSOCHAM Northern Region Development Council and President of Tractor and Mechanization Association (TMA). Views expressed in the above piece are personal and solely those of the author. They do not necessarily reflect News18’s views.
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