One, finance minister Nirmala Sitharaman emphasized in her budget speech that the government is keen to ensure that all Indians—irrespective of religion, caste, gender or age—enjoy the fruits of economic prosperity. There is a special focus on employment, skilling, MSMEs and the middle class.
Two, and more importantly, her development measures and aspirations are undergirded by an expectation that cooperation from states will help achieve budgetary goals. States are supposed to be the Centre’s equal partners in the process of fostering economic growth and development.
Multiple measures in the budget have states as their touchpoints. The ambition on agriculture reforms, the ₹1.1-trillion infrastructure push, development of industrial parks with states to spur manufacturing, urban development plans and ramp-up of skilling, among others, are all projects that envisage intense cooperation between the Centre and states.
But the pathway seems somewhat uneven, skewed by realpolitik and rutted by the presence of incentives which could squeeze resource transfers to states.
The shadow of electoral politics over budget-making has ensured that Andhra Pradesh and Bihar find special favours for supporting the ruling coalition. As a return gift to Chandrababu Naidu, the government is facilitating special financial support of ₹15,000 crore for Andhra from multilateral development agencies during FY25, with promises of more to come in future years. This is in addition to grants for Andhra’s backward areas and capital commitments for stuck projects and future infrastructure outlays. Oddly, Andhra—a southern state—has been lumped with eastern states like West Bengal and Odisha for accessing benefits from the new Purvodaya scheme.
Likewise, Bihar finds itself the recipient of fresh capital flows for investment in road connectivity projects, power plants ( ₹21,400-crore project cost), tourism centres, industrial parks, new airports, medical colleges and sports infrastructure.
These allocations, at one level, make sense from a development perspective. But the politically motivated largesse starts to look decidedly curious in the face of a funds squeeze for other states.
Tax devolution to the states is up by only 13%, compared with over 16% growth in FY24. Non-tax devolution, on the other hand, is up by 10.4% compared with a sub-1% growth in the previous year. Data from state budgets, though, shows that growth of total fund transfers from the Centre to the states—tax devolution plus grants—has been slowing every year.
This squeeze gets further accentuated by the introduction of an incentive framework as a prerequisite for accessing central financial resources. For example, the government is working on introducing a new, and shinier, Ease of Doing Business framework. The states will have to be critical partners in this endeavour. But the Centre has adopted a carrot-and-sticks approach, rather than adhere to the earlier promise of cooperative federalism: “…states will be incentivized for implementation of their Business Reforms Action Plans and digitalization.”
FM Sitharaman even acknowledges that many of the reform measures will require close collaboration between the Centre and the states because, “…development of the country lies in development of the states.”
And, yet, in the middle of this funds crunch, the budget is asking states to cut stamp duty, which is perhaps among the largest sources of revenue for many states. It is, therefore, unlikely that states will oblige, unless something else yields.
Ironically, the budget proposal to cut stamp duty contradicts the Fifteent Finance Commission’s recommendation for states to raise more revenue through higher stamp duty and registration fees.
The fund-sharing framework, conceptualized by the Fifteenth Finance Commission and adopted by the government, envisages an economic model that assumes states have the necessary agency in garnering tax and non-tax revenue which is independent of the general economic environment.
In an economy wracked by stagnant manufacturing and agriculture output, rising unemployment, shrinking real wages and sluggis consumption growth, states have limited options for raising revenue. This adversely affects state spending and, in times of economic stress, indubitably influences poll outcomes.