Union Budget 2021-22: Do states have much to cheer for?

The recommendations of the 15th Finance Commission are unlikely to make much of a difference to cash-strapped states 

By Rajit Sengupta
Published: Thursday 11 February 2021

The recommendations of the 15th Finance Commission accepted by the Union finance minister, experts believe, are unlikely to make much of a difference to the states that are already cash-strapped.

The commission talks about how the Centre will share the taxes with state and local governments (vertical devolution). This amount is beyond that accounted for in the budget. There are three broad recommendations by the current finance commission which are worth noticing.

The first recommendation is that 41 per cent of the central tax pool will be shared with the state and local governments in 2021-2026. This remains unchanged from the last Finance Commission recommendations. 

R Ramakumar, professor, Centre for Study of Developing Economies, Tata Institute of Social Sciences, Mumbai warned the effective share for the states has in fact shrunk. The government, in the past few years, mostly introduced cess and surcharges as they do not need to be shared with the states.


The sharp economic contraction induced by the novel coronavirus disease (COVID-19) pandemic has also triggered a fall in the Centre’s tax collection revenue. With the goods and services tax (GST) absorbing several state-level taxes, the low tax collection severely batters the state coffers.

On top of this, if the Centre hikes some tax components through cesses and surcharges, the state will not benefit from it even if the revenue generated from those components has grown.

The Centre for Budget and Governance Accountability (CBGA), in a piece written for Down to Earth in the run-up to the Budget, cited the example of the growth in excise duty collection for a period where the overall collection diminished.

Data from the Controller General of Accounts (CGA) shows that gross tax collections was down by 12.6 per cent in between April and November 2020 compared to the same period in 2019. The excise duty collection for the period, however, increased by nearly 48 per cent.

A large part of this increased mop up was due to hikes in central excise duty levied on petrol and diesel in the months of March and May 2020, the piece said.

Yet, the states did not benefit from this because two of the three components that make up the excise duty — additional excise duty (road and infrastructure cess) and special additional excise duty — are in the nature of cesses and surcharges and therefore are not shareable with states.

The second recommendation is that revenue deficit grant for states have been reintroduced. This was rejected by the previous commission. This will give some financial independence to the state governments which are already cash-strapped. “But we need to remember that this is a one-time support,” Ramakumar said.

Finally, while the amount allocated for the grants to the local bodies remains unchanged, it will now be distributed not only among the gram panchayats but also between the zila panchayat and other local bodies. “This is important as previously large chunk of resources given to the gram panchayat has remained unspent. Bigger spread would facilitate better utilisation,” said Nilachala Acharya, director-research at CBGA.

The final blow, economists fear, is the budget’s announcement of the new agriculture infrastructure cess levied on diesel (Rs 4 a litre), petrol (Rs 2.5 a litre) and a few other commodities. They explain that while on the one hand, the budget has offered little to the communities in distress, the new cess on fuel coming on top of continuous increases in excise duties on petrol over the year, will have a ripple effect on all other prices and hit the real incomes of working people.

The Union Budget 2021-22 elicited mixed reactions from the state heads. The chief ministers of states and Union territories without a BJP government critisised the provisions in the Budget. Most called it an attempt by the Centre to hand over the public sector units like railways, ports, banks and other financial institutions to private players.

Kerala chief minister Pinarayi Vijayan, for example, said the Centre is trying to leave the country entirely in the commercial interest. “The budget proposals to privatise more public sector companies and increase foreign investment in the insurance sector indicates the government will withdraw from all sector,” he told news agency ANI.

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