State Finances Report

STATE OF STATE
FINANCES
Aravind Gayam
Vatsal Khullar
October 2016
States spend 30% more than centre
No change in spending on key sectors

post Finance Commission
States spend 21% of receipts on

servicing debt
This report analyses finances of the following 17 states based on their 2016-17 budget documents.
State
Abbreviation
State
Abbreviation
State
Abbreviation
Andhra Pradesh
AP
Jammu and Kashmir
JK
Punjab
PB
Bihar
BR
Karnataka
KA
Rajasthan
RJ
Chhattisgarh
CG
Kerala
KL
Telangana
TS
Delhi
DL
Madhya Pradesh
MP
Uttar Pradesh
UP
Gujarat
GJ
Maharashtra
MH
West Bengal
WB
Haryana
HR
Odisha
OD
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INSIGHTS
States spend 30% more than the central government
In 2015-16, the centre budgeted to spend Rs 17.6 Figure 1: States spend more than the centre
lakh crore. All states together budgeted to spend
25
approximately Rs 23.4 lakh crore, which was 30%
higher than that of the centre.
20
Finances of states have been changing due to (i)

increased devolution of central taxes, (ii)
rationalisation of the Centrally Sponsored
Schemes, (iii) the introduction of the UDAY
scheme, and (iv) the proposed introduction of
GST, among other reasons.
15
Sharp increase
since 2014
10
5
0
This report analyses the financial position of 17

states (including one union territory with
legislature), based on their annual budgets across
the last few years.1 These states account for over
80% of the total expenditure by all states.
2006
2008
2010
2012
Centre
2014
2016
States
Note: Figures in lakh crore rupees. Centres expenditure includes

grants given to states.
Sources: Indian Public Finance Statistics, Ministry of Finance; PRS.
No significant change in spending on key sectors post 14th Finance Commission
Following the increase in tax devolution to

states, and rationalisation of central
spending on schemes, the state expenditure
on key social and economic sectors did not
witness a substantial change.
Figure 2: No change in state spending on key sectors

18.4%
20%
16.4%
14th Finance Commission

14.4%
14.8%
14.8%
5.2%
5.8%
6.0%
10%
Expenditure on education grew from 14% in

2015 to 15% in 2016. Spending on health
and rural development also witnessed
marginal increases during this period.
0%
4.0%
3.5%
4.2%
3.8%
3.6%
3.9%
4.0%
2012-13
2013-14
2014-15
2015-16
2016-17
Education
Health
Rural Development
Note: Figures are as a percentage of total expenditure.

Sources: Respective State Budget Documents; PRS.
States spend 21% of their total receipts (excluding borrowings) on debt servicing
Figure 3: Punjab and West Bengal spend a large proportion of receipts on servicing debt (2013-17)
70%
80%
58%
60%
33%
40%
19%
20%
23%
11%
7%
28%
26%
24%
14%
12%
10%
10%
MP
OD
17%
12%
14%
TS
UP
0%
AP
BR
CG
DL
GJ
HR
JK
KA
KL
Debt Repayment
MH
PB
RJ
WB
Interest Payment
States spend close to 21% of their total receipts (excluding borrowings) on servicing their debts
(interest payment and principal repayment) between 2013 and 2017.
RECEIPTS
Receipts indicate the resources available with states to meet their spending priorities. Receipts may
be broadly categorised under revenue or capital heads. Revenue receipts of states comprise of their
own revenue receipts and funds transferred by the centre. Own revenue receipts of states comprise of,
(i) tax revenue which includes various taxes levied by states such as sales tax, excise duty, and stamp
duty, and (ii) non-tax revenue, which includes fees charged for providing services such as electricity,
water, and forestry. Central transfers to states consist of, (i) share in taxes devolved from the central
pool of taxes, and (ii) grants-in-aid for specific purposes and schemes.
Capital receipts result in a change in the assets or liabilities of a state, and include, (i) borrowings of
the state, (ii) repayment received for loans advanced by the state, and (iii) proceeds from
disinvestment of state public sector enterprises. The capital receipts of states, excluding borrowings,
constitute less than 5% of the total receipts of states. For this section, we primarily focus on analysing
revenue receipts of states.
Growth in Revenue Receipts

Revenue receipts of states grew at a higher rate than Figure 4: State revenues growing faster than the
centre (1991-2016)
the centre
Since the early 1990s, revenue receipts of the 17
states have witnessed an annual growth in the range
of 10% to 15%, on an average. These receipts have
expanded at a rate higher than the centre from 2002
onwards. Between 2012 and 2017, the average
growth in revenue receipts for these states has been
over 15% (Figure 4).
The revenue growth over the five-year period ranged
from 13% in Maharashtra to 19% in Bihar. This
growth was led by central transfers, followed by
states own receipts. Growth rate for tax and non-tax
revenue for all states can be found in Figure 6.
20%
16.2%
16.6%
13.9%
10%
13.8%
10.1%
15.6%
16.6%
11.6%
9.8%
12.9%
0%
1992-97
1997-02
2002-07
Centre
2007-12
2012-17
States
Sources: State Finances: A Study of Budgets, RBI; Respective State

Budget Documents; PRS.
Revenue composition of states

High proportion of revenue earned by levying taxes
In 2016-17, taxes levied by the 17 states constitute 48% of their total revenue receipts, thereby being
the largest revenue component for most states. However, in certain states with lower per-capita
income such as Bihar, Jammu and Kashmir and Odisha, the revenue from taxes is less than 30% of
their total revenue receipts. This may be due to the low per-capita income resulting in lesser sale and
consumption of goods. The inadequacy of tax revenue collected by these states has been
supplemented by transfers from centre in the form of grants, which constitute 20% of the total receipts
and devolved central taxes, which constitute 23% of the total receipts.
Figure 5 presents the shift in revenue composition of states between 2006-07 and 2016-17. During
the decade, most states saw an increase in the share of central transfers in their revenue composition.
This was due to the central transfers growing at an average rate of 18%, which was higher when
compared to the own revenue receipts of states growing at 15%. Among individual states, the share
of tax revenue increased in some states such as Punjab and Bihar, while it reduced by close to 10% in
others such as Kerala.
Figure 5: Own taxes constitute the largest proportion in revenue receipts (2007-17)
2006-07
Actuals
Andhra Pradesh (AP)
2016-17
Budgeted
54%
Bihar (BR)
15%
17% 2%
Chhattisgarh (CG)
58%
44%
13%
Delhi (DL)
60%
Haryana (HR)
61%
Jammu and Kashmir (JK)

Karnataka (KA)
Kerala (KL)
66%
Madhya Pradesh (MP)
41%
14% 10%
GJ
61%
7% 6%
HR
64%
Maharashtra (MH)
64%
Odisha (OD)
34%
Punjab (PB)
14%
38%
West Bengal (WB)
45%
0%
Non Tax
KA
34%
24%
45%
Uttar Pradesh (UP)
11% 14% 13%

12%
13%
11%
5%
26%
33%
15%
RJ
13%
UP
Central Taxes
Grants-in-aid
30%
22%
8%
2% 9%
11% 16%
18%
37%
54%
5%
13%
9%
8%
43%
0%
Tax
Non Tax
14%
19%
34%
61%
39%
18%
10%
9% 14% 11%
13%
36%
21%
35%
65%
30%
12%
13% 10% 13%
56%
WB
100%
27%
64%
OD
PB
50%
18%
MH
9% 13%
17%
12%
20%
88%
MP
18%
38%
36%
KL
17%
12% 10% 14%
54%
Rajasthan (RJ)
JK
18%
47%
DL
67%
31%
2%
12% 5%
5% 18%
10%
24%
11%
CG
26%
62%
BR
51%
15%
28%
16%
16% 5% 12%
AP
11%
23%
83%
Gujarat (GJ)
Tax
20%
11%
9%
2%
26%
38%
32%
50%
Central Taxes
24%
18%
14%
20%
18%
26%
100%
Grants-in-aid
Note: Andhra Pradesh (AP) includes the states of Andhra Pradesh and Telangana.
Taxation powers in India

Taxation powers are broadly divided between the centre and states. In addition, state legislatures
may devolve some of their taxation powers to local bodies (i.e. panchayats and municipalities). As
a result, the taxes levied by these local bodies may vary from state to state. A break-up of taxes
levied by the centre, states and local bodies can be found in the table below.
Taxes levied by the centre, state and local bodies
Centre
Income Tax
Corporation Tax
Customs (on Import) and Export Duty
Excise Duty on Manufacturing of Goods
Service Tax
States
Sales Tax
Tax on Electricity Consumption
Excise Duty on Alcohol
Stamp Duty
Agricultural Income
Local Bodies
Tax on Land and Building
Entry Tax on Goods
Vehicle Tax
Toll Tax
Entertainment Tax
While the centre levies taxes on items such as income and services, the revenue from these taxes is
shared by the centre with states. The ratio of tax devolution from the centre to states is determined
by the Finance Commission, which is constituted every five years. The 14th Finance Commission
increased the share of central taxes devolved to states from 32% to 42%, in February 2015.
Own tax revenue of states grows at 13%; Non-tax revenue at 16%
In the five-year period between 2011-12 and 2016-17, the revenue generating sources of states-tax
revenue and non-tax revenue witnessed varied rates of growth. The average growth in non-tax
revenue (16%), was higher than the growth in tax revenue (13%). As seen in Figure 6, growth in
taxes was led by Bihar (19%), which was followed by Rajasthan and West Bengal, while other states
witnessing high growth in non-tax revenue included Kerala (33%), followed by Punjab, and Bihar. In
states such as Kerala, the high growth in non-tax revenue was on account of increased revenue
collections from state lotteries, among other reasons.
Figure 6: Own tax revenue of states grows at 13%; Non-tax revenue at 16% (2012-17)
35%
15.3%
14.0%
16.0%
10.1%
11.5%
10.5%
11.5%
12.8%
12.5%
14.2%
15%
10.0%
12.8%
15.4%
15.0%
20%
18.7%
25%
14.5%
30%
14.9%
19.0%
8.9%
22.2%
8.8%
19.6%
8.9%
33.2%
8.8%
15.0%
12.0%
18.7%
16.7%
12.8%
21.5%
5%
14.5%
10%
0%
AP
BR
CG
DL
GJ
HR
JK
Tax Revenue
KA
KL
MP
MH
Non-Tax Revenue
OD
PB
RJ
UP
WB
Sources: State Finances: A Study of Budgets, RBI; Respective State Budget Documents; PRS.
Sales Tax constitutes the largest share in tax revenue of states

Figure 7: Sales Tax constitutes the largest share in tax
revenue (2016-17)
States levy Sales Tax or Value Added Tax (VAT)

on the sale of all goods. As seen in Figure 7, this
is the largest component of their tax revenue, with
a share of over 60%. Most states do not provide a
break-up of the amount of Sales Tax collected
from each item. However, states such as Andhra
Pradesh and Telangana are expected to receive
18% of the Sales Tax from the sale of excisable
goods (such as alcohol) in 2016-17.
Electricity Tax and Duty, 4% Others, 3%

Goods and Passenger Tax, 5%
Vehicle Tax, 5%
Stamp Duty, 9%
Other taxes for the 17 states, such as Excise Duty

levied on the manufacture of alcohol constitutes
12% of the tax revenue, followed by Stamp Duty
(9%) on land and building registration. The
remaining tax revenue is generated by levying
taxes on vehicles, goods and passengers entering
a state, and supply of electricity, among others.
Excise Duty, 12%

Sales Tax/VAT,
62%
Goods and Services Tax

The Goods and Services Tax (GST) will subsume several indirect taxes levied by the centre and
states on goods and services. This includes taxes imposed by the centre such as Service Tax and
Union Excise Duty, as well as those by states such as Sales Tax and Goods and Passenger tax.
Under the GST framework, these taxes will be subsumed under three taxes, (i) the Central GST, (ii)
the State GST, and (iii) the Integrated GST (tax levied on inter-state trade). The tax rates for GST
will be recommended by the GST Council, consisting of the Union Finance Minister and finance
ministers from all states. Alcohol for human consumption will be kept outside the ambit of GST,
while the GST Council will decide when petroleum products will be brought under the purview of
the proposed tax. The receipts from the Central GST will be shared by the centre with all states.
Tax Revenue Collection

States estimated to maintain tax-GSDP ratio in the range of 5% to 8%
One of the ways to measure levels of tax collection is by using the tax to Gross State Domestic
Product (GSDP) ratio. The ratio compares the tax collection of a state to its GSDP, indicating the
proportion of economic activity which has translated into tax collection. A higher tax-GSDP ratio
indicates that economic growth has translated into tax collection for the state. For example, a ratio of
7% indicates that for every 100 rupees of economic activity in the state, 7 rupees were collected as
taxes by the state. Factors that impact the ratio include the efficiency of the tax administration,
change in tax rates, and the number of taxpayers under the tax network.
As seen in Figure 8, in 2016-17, states are expected to have their tax-GSDP ratio ranging from 5% in
West Bengal to 8% in Telangana. Note that the tax to Gross Domestic Product (GDP) ratio of the
central government has been consistent, at around 7% for the last few years.
The implementation of GST is expected to improve tax compliance and hence positively impact
collections. On the other hand, the removal of cascading effect of taxes (tax on tax) may result in a
reduction in tax collection for the state.2 It remains to be seen if the GST will eventually result in an
improved or worsened tax-GSDP ratio. This would depend, among other factors, on the GST rate
levied on various goods and services. For the first five years of the implementation of GST, the
central government will cover any shortfall to the states tax collection. The GST Council has set
2015-16 as the base year, and a benchmark 14% annual growth in revenues for this purpose.
MH
OD
PB
RJ
5.1%
MP
8.2%
KL
6.9%
7.1%
KA
6.7%
6.9%
JK
6.1%
7.0%
HR
6.5%
6.8%
GJ
6.5%
6.5%
5.3%
7.7%
10%
7.8%
Figure 8: Tax-GSDP ratio estimated to be in the range of 5% to 8% (2016-17)
5%
0%
AP
BR
CG
TS
WB
Devolution of funds from the central government to states

Growth in funds devolved from the centre to states
The Constitution envisages that the centre should share a
proportion of its taxes with states. The transfer of
resources from the centre supports the expenditure of
states, even if their own revenue receipts are not
commensurate with their spending priorities. The
central taxes devolved to states are untied funds, and
states can spend them according to their discretion. The
manner in which these taxes are to be shared by the
centre with states is determined by the Finance
Commission, which is set up every five years. In
addition, the centre also provides grants to states, most
of which are tied in nature, implying that they must be
used for specified purposes.
th
Distribution of taxes among states

The 14th Finance Commission revised the
methodology used to determine the
distribution of central taxes devolved by
the centre across all states.3
Horizontal distribution criteria
Finance Commission
Population (1971)
Population (2011)
Income Distance
Area
Forest Cover
Fiscal Discipline
Total
13th
25.0
0
47.5
10.0
0
17.5
100
14th
17.5
10.0
50.0
15.0
7.5
0
100
Note: Income Distance is the difference between the per

capita income of a state with the average per-capita income
of all states. Fiscal Discipline evaluates capacity of a state
to generate revenue.
Sources: Economic Survey 2014-15; PRS.
The 14 Finance Commission, in February 2015, sought

to increase the devolution of untied funds to states.
Consequently, it recommended that the proportion of
central pool of taxes devolved to states should be increased from 32% to 42%.3 In Table 1, the first
column indicates the share of states in funds devolved by the centre, and the second column indicates
the funds received by states for every 100 rupees added to the divisible pool of taxes.
5
Table 1: Share of states in funds devolved by the centre

Share of States Share of States
(%)
(Out of 32%)
6.94
2.22
10.92
3.49
2.47
0.79
3.04
0.97
1.05
0.34
1.55
0.50
4.33
1.38
2.34
0.75
7.12
2.28
5.20
1.66
4.78
1.53
1.39
0.44
5.85
1.87
N.A.
N.A.
19.68
6.30
7.26
2.32
16.09
5.15
100
32
States
Andhra Pradesh
Bihar
Chhattisgarh
Gujarat
Haryana
Jammu & Kashmir
Karnataka
Kerala
Madhya Pradesh
Maharashtra
Odisha
Punjab
Rajasthan
Telangana
Uttar Pradesh
West Bengal
Other States
All States

Share of States Share of States
(%)
(Out of 42%)
4.31
1.81
9.67
4.06
3.08
1.29
3.08
1.30
1.08
0.46
1.85
0.78
4.71
1.98
2.50
1.05
7.55
3.17
5.52
2.32
4.64
1.95
1.58
0.66
5.50
2.31
2.44
1.02
17.96
7.54
7.32
3.08
17.21
7.23
100
42
Sources: Reports of the 13th and 14th Finance Commissions; PRS.
With an increase in the proportion of untied funds being devolved to states, the centre revised the
resource-sharing pattern for schemes and other programmes. As part of the revision, several schemes
for which tied grants were given to states were discontinued. In addition, the fund sharing pattern of
some other schemes was altered to reduce the central government share. This was done to allow
states the flexibility of deciding the schemes they would wish to continue implementing using the
additional funds received by them. Figure 9 compares the composition of central transfers received
by states in 2014-15 and 2015-16. Note that recommendations of the Finance Commission were
implemented from 2015-16 onwards.
Figure 9: Share of taxes in central transfers increases after 14th Finance Commission
2014-15
2015-16
Actuals
Revised
AP
BR
CG
GJ
HR
JK
KA
KL
MP
MH
OD
PB
RJ
TS
UP
WB
41%
66%
34%
48%
52%
49%
51%
41%
59%
22%
78%
50%
50%
51%
49%
58%
47%
42%
53%
56%
44%
44%
56%
50%
50%
53%
67%
54%
0%
AP
BR
CG
GJ
HR
JK
KA
KL
MP
MH
OD
PB
RJ
TS
UP
WB
59%
47%
33%
46%
50%
Central Taxes
Central Grants
100%
Sources: Respective State Budgets; PRS.
55%
45%
70%
30%
57%
43%
56%
40%
44%
60%
27%
73%
65%
59%
35%
41%
66%
53%
34%
47%
58%
61%
57%
50%
42%
39%
43%
50%
68%
58%
0%
32%
42%
50%
Central Taxes
Central Grants
100%
Barring Telangana and a marginal decrease of 1% in Haryana, states saw an increase in the share of
taxes received from the centre, as a result of increased fund devolution. The highest increase was
seen in Punjab, where the share of central taxes increased from 44% in 2014-15 to 61% in 2015-16.
Grants-in-aid from the centre increased by 20% between 2012 and 2017
The central government also provides tied grants to states for operating schemes, programmes, and for
other specified purposes. For example, grants are provided to the state for running schemes such as
Sarva Shiksha Abhiyan and the National Health Mission, among others. Between 2012 and 2017,
states on an average witnessed a growth rate of 21% for grants-in-aid received from the centre. As
seen in Figure 10, states with a growth rate of over 25% and above included Bihar (28%), Rajasthan
(27%) and Kerala (25%).
19.8%
23.2%
26.7%
22.8%
17.9%
15.5%
10.9%
13.8%
20%
19.7%
24.6%
20.0%
30%
22.9%
28.1%
30.8%
40%
25.1%
Figure 10: Central grants devolved to states grow by 20% (2012-2017)
17.6%
16.0%
16.0%
20.4%
16.8%
18.8%
19.1%
19.9%
19.5%
22.1%
18.2%
18.9%
24.2%
15.9%
16.8%
10%
0%
AP
BR
CG
GJ
HR
JK
KA
KL
Central Taxes
MP
MH
OD
PB
RJ
UP
WB
Central Grants
EXPENDITURE
States largely spend funds on three key services provided by them: (i) economic services, such as
agriculture, transport, and electricity, (ii) social services, such as education, health, and housing, and
(iii) general services, which includes administration in the state.
Figure 11: State expenditure growing faster than the
centre (1991-2016)
State expenditure grew faster than central

expenditure between 2012 and 2017
Expenditure of states is focused on providing
essential services such as, creating infrastructure in
the form of roads and schools, aiding growth of
sectors such as agriculture and manufacturing,
ensuring public safety, and providing subsidies to
people in the state.
Between 2012 and 2017, expenditure of states grew
at an average rate of 20.6% annually. This is higher
than the growth of central government expenditure,
which grew at an average of 8.9% annually.
25%
21.9%
15%
10%
14.3%
13.1%
12.6%
12.2%
16.4%
11.9%
8.9%
8.7%
5%
0%
1992-97
1997-02
2002-07
States
2007-12
Centre
20.6%
20%
2012-17
Revenue and Capital Expenditure

States spend 16% of their total expenditure on capital expenses, while the centre spends 13%
A large proportion of states spending is on
Figure 12: States spend a higher share of
revenue expenditure. This includes expenses such expenditure on capital expenses
as administration, implementation of schemes, and
20%
16.5%
payment of salaries. While revenue expenditure
14.5%
13.8%
13.4%
meets annual spending requirements of certain
government services, the rest is spent on capital
13.3%
expenses which creates infrastructure (such as
10%
12.0%
11.8%
11.8%
road and buildings). The returns on infrastructure
created may accrue over the long term. Capital
expenditure also includes repayment of loans.
15.6%
12.5%
0%
In 2016-17, the 17 states have budgeted to spend
2013
2014
2015
2016
2017
16% of their total expenditure on capital expenses.
States
Centre
This is higher than the central government
Capital expenditure excludes repayment of loans.
expenditure of 13% on capital expenses. Note that Note:
Sources: Union and Respective State Budget Documents; PRS.
central grants to states, which are reflected as
revenue expenditure in the Union Budget, may also be used by states for the creation of assets (capital
expenditure).
Figure 13 presents a comparison of 17 states based on revenue expenditure, capital expenditure and
loan repayment. A higher proportion of a states expenditure on the repayment of loans may indicate
that lesser funds are being spent on creating infrastructure such as schools, hospitals, roads, and
bridges. Among the 17 states, Punjab is expected to spend 27% of its total expenditure on loan
repayment, while Odisha and Telangana are expected to spend 1%.
OD
PB
RJ
TS
UP
WB
6%
25%
10% 21%
68%
4%
MH
23%
73%
1%
MP
23%
75%
KL
20%
77%
KA
27%
67%
3%
1%
JK
20%
79%
12% 5%
83%
5%
73%
HR
22%
8% 11%
80%
4%
16%
80%
GJ
14%
62%
14% 10%
76%
6%
DL
19%
75%
4%
CG
19%
77%
3%
BR
19%
78%
3%
76%
AP
21%
84%
100%
12% 4%
Figure 13: Over 70% of the expenditure of states is on revenue items (2016-17)
50%
0%
Revenue Expenditure
Capital Expenditure
Repayment of loans
Note: Capital Expenditure excludes funds spent on repayment of loans.

Expenditure across sectors

Education is the top priority; Spending on rural development almost doubled in the last five years
Over the last five years, the 17 states spent the highest proportion of their budget on education,
followed by energy, rural development, and agriculture. In 2016-17, states are expected to spend
approximately 17% of their total expenditure on education, which is higher than their cumulative
expenditure on energy and rural development sectors. Between 2012 and 2017, while spending on
rural development witnessed the highest increase from 4.1% of the total expenditure of states to 6.2%,
spending on irrigation, and roads and bridges saw a decline. Figure 14 compares the expenditure of
states across major sectors, between 2012 and 2017.
Figure 14: States spend the highest share of expenditure on Education (2012-17)
18%
0.7%
0.7%
7.9%
9%
3.0% 2.1%
1.6%
0%
16.1% 14.3% 3.7% 4.2% 2.8%
1.1%
4.9%
5.7%
3.2%
1.0% 0.6% 1.0% 0.6%

4.1% 4.7% 4.1% 4.7%
2.7%
0.8% 0.6%
0.2%
3.3% 3.5%
3.9% 3.3%
2.1% 1.8%
1.7% 1.2%
2012 2017 2012 2017 2012 2017 2012 2017 2012 2017 2012 2017 2012 2017 2012 2017 2012 2017
Education
Energy
Rural
Agriculture Welfare of
Development
SC/ST/OBCs
Revenue Expenditure
Irrigation
Health
Roads &
Bridges
Police
Capital Expenditure
Note: Figure for Police for 2012 includes both revenue and capital expenditure.
While all sectors require revenue and capital expenditure, the ratio between the two heads may
depend on the nature of the sector. Thus, sectors with a large workforce (such as education and
police) may require higher revenue expenditure to pay salaries, and a lower capital expenditure if the
requisite infrastructure has already been created. Other sectors such as irrigation, roads and bridges
may require a relatively higher proportion of capital expenditure for creating assets.
Ujwal Discom Assurance Yojana

In November 2015, the central government launched the Ujwal Discom Assurance Yojana (UDAY),
to improve the financial situation of state-owned power distribution companies (discoms). The
discoms have been accumulating losses due to various reasons, including low power tariffs. As a
result, the debt of the discoms stood at over Rs 4 lakh crore as on March 2015.4
States signing up for the UDAY scheme were required to take over 75% of the discoms debt over a
period of two years. 50% of the debt was to be taken over in the first year (2015-16), and the
remaining 25% in the second year (2016-17). To incentivise states to participate, the scheme
provided that the debt taken over from discoms would not be included in the fiscal deficit for 2015-16
and 2016-17 for the purpose of the Fiscal Responsibility and Budget Management Act limits.
The RBI annual study on state budgets in 2016 noted that while UDAY is expected to improve the
situation of discoms, it may adversely impact finances of states in the years to come. The absorption
of debt may lead to increased liabilities for the state in the future. In addition, the interest payment
burden on states is expected to go up immediately.5
Expenditure on key sectors after the change in tax devolution to states
3.8%
Education
6.0%
3.6%
3.9%
4.0%
2016-17
4.2%
0%
5.8%
2015-16
3.5%
5.2%
2014-15
4.0%
2013-14
As seen in Figure 15, between 2014-15 and 2016-17,

expenditure of states on these sectors is expected to
grow marginally. During this period, spending on
education as a percentage of total expenditure is
expected to increase from 14.2% to 14.6%. Similarly,
expenditure on health and rural development is
expected to witness marginal increases. A comparison
of state expenditure on these sectors between 2014-15
and 2015-16 can be found in Table 2.
2012-13
Following the Finance Commission recommendations, Figure 15: No change in spending on key sectors
18.4%
the centre increased devolution of central taxes in 2015- 20%
16.4%
16 to give greater autonomy regarding spending to
14.8%
14.8%
14.4%
states. Combined with the rationalisation of central
spending on schemes, the impact on allocations for
sectors such as education, health and rural development
10%
was uncertain.
Health
Rural Development
Note: Data does not include Delhi.

Table 2: Expenditure on sectors as a % of total expenditure

Education
State
2014-15
Health
2015-16
2014-15
Rural Development
2015-16
2014-15
2015-16
Andhra Pradesh
15.2%
15.0%
3.5%
3.5%
7.6%
7.6%
Bihar
15.8%
18.6%
5.2%
3.4%
11.7%
11.4%
Chhattisgarh
20.0%
19.2%
5.8%
5.2%
8.1%
8.6%
Gujarat
14.1%
15.5%
4.8%
4.9%
3.8%
3.5%
Haryana
15.6%
13.5%
4.2%
3.2%
3.2%
3.0%
Jammu and Kashmir
13.4%
13.4%
4.6%
5.5%
3.7%
3.4%
Karnataka
13.2%
14.7%
3.8%
4.3%
4.0%
3.7%
Kerala
16.5%
16.6%
5.1%
5.6%
3.9%
2.9%
Madhya Pradesh
17.6%
15.1%
4.3%
3.9%
7.2%
7.3%
Maharashtra
19.1%
19.4%
3.8%
4.7%
6.4%
3.3%
Odisha
14.7%
14.1%
4.7%
4.3%
8.7%
9.7%
Punjab
11.7%
11.9%
3.5%
3.7%
0.8%
0.9%
Rajasthan
14.9%
12.4%
4.1%
3.2%
8.6%
7.8%
Telangana
8.1%
10.4%
3.9%
3.2%
5.2%
5.9%
Uttar Pradesh
16.2%
14.4%
3.7%
3.0%
5.3%
4.6%
West Bengal
16.8%
14.8%
4.1%
4.7%
8.2%
11.2%
Education
In 2016-17, the 17 states are expected to spend 15% of their total expenditure on education on an
average. Delhi is expected to spend the highest on education, accounting for 23% of its expenditure.
This is followed by Chhattisgarh (20%) and Maharashtra (18%). On the other hand, Telangana has
budgeted to spend the lowest on education (8%). Figure 16 compares expenditure of the 17 states on
education in 2016-17.
14.1%
16.2%
8.2%
14.9%
11.7%
18.0%
14.8%
KA
16.6%
JK
14.1%
HR
12.7%
22.9%
GJ
12.0%
BR
14.1%
AP
15%
14.1%
15.8%
20%
15.1%
25%
19.5%
Figure 16: Expenditure on Education in 2016-17 (as a % of total expenditure)
10%
5%
0%
CG
DL
KL
MH
MP
OD
PB
RJ
TS
UP
Health
In 2016-17, the 17 states are expected to spend 5% of their total expenditure on health. Delhi has
budgeted to spend 11% on health, which was the highest among all 17 states. This is followed by
Chhattisgarh (6%). Punjab (4%) and West Bengal (4%) are among the states with the lowest
expenditure on health. Figure 17 compares expenditure of the 17 states on health in 2016-17.
10
WB
4.0%
3.7%
3.5%
OD
4.1%
4.7%
MP
3.5%
4.2%
3.6%
JK
4.3%
HR
3.7%
4.2%
CG
3.8%
5.6%
BR
3.6%
6%
5.2%
12%
4.8%
11.2%
Figure 17: Expenditure on Health in 2016-17 (as a % of total expenditure)
RJ
TS
UP
WB
0%
AP
DL
GJ
KA
KL
MH
PB
Welfare of SC, ST and OBCs

Welfare programs for SC, ST and OBCs include expenditure on scholarships, in addition to
construction and maintanance of hostels for SC and ST students. Spending for these programs may
vary depending on the SC and ST population in the state. In 2016-17, Telangana (8%) is expected to
have the highest expenditure on SC, ST and OBCs. This is followed by Andhra Pradesh (7%) and
Karnataka (6%). Figure 18 compares expenditure of the 17 states on welfare of SC, ST, and OBCs in
2016-17.
Figure 18: Expenditure on Welfare of SC, ST and OBCs in 2016-17 (as a % of total expenditure)
0.8%
1.6%
OD
1.0%
MP
1.5%
2.5%
2.9%
DL
0.2%
0.9%
CG
0.7%
0.8%
2.5%
2.5%
5%
2.8%
4.6%
5.6%
7.3%
8.2%
10%
0%
AP
BR
GJ
HR
JK
KA
KL
MH
PB
RJ
TS
UP
WB
Agriculture
In 2016-17, the 17 states are expected to spend 6% of their total expenditure on agriculture, on an
average. Chhattisgarh is expected to spend the highest proportion, accounting for 13% of its total
expenditure. This is followed by Maharashtra (9%), Karnataka (8%) and Punjab (8%). Figure 19
compares expenditure of the 17 states on agriculture in 2016-17.
Figure 19: Expenditure on Agriculture in 2016-17 (as a % of total expenditure)
2.3%
3.0%
6.2%
8.1%
PB
3.8%
7.8%
5.4%
5.1%
4.8%
OD
0.3%
4%
3.7%
3.0%
4.7%
6.1%
8%
8.1%
12%
8.6%
12.6%
16%
UP
WB
0%
AP
BR
CG
DL
GJ
HR
JK
KA
KL
11
MH
MP
RJ
TS
Irrigation
In 2016-17, the 17 states are expected to spend 5% of their total expenditure on irrigation.
Expenditure under this head may depend on the topography and availability of water resources in the
state, among other factors. Telangana is expected to spend 21% of its total expenditure on irrigation,
which is the highest among all the 17 states. This is followed by Maharashtra (9%) and Karnataka
(7%). Figure 20 compares expenditure of the 17 states on irrigation in 2016-17.
20.6%
Figure 20: Expenditure on Irrigation in 2016-17 (as a % of total expenditure)

25%
RJ
2.1%
2.4%
PB
4.0%
3.1%
JK
2.1%
HR
8.6%
0.9%
1.9%
7.0%
2.7%
6.2%
0.6%
5%
3.8%
2.0%
10%
5.8%
15%
4.9%
20%
0%
AP
BR
CG
DL
GJ
KA
KL
MH
MP
OD
TS
UP
WB
Rural Development
In 2016-17, the 17 states are expected to spend 6% of their total expenditure on rural development.
Bihar has budgeted to spend 12% of its total expenditure on rural development, which is the highest
among the 17 states. This is followed by Odisha (9%), and Rajasthan (9%). On the other hand,
Punjab and Haryana are among the states with the lowest budgeted expenditure on the sector. Figure
21 compares expenditure of the 17 states on rural development in 2016-17.
Figure 21: Expenditure on Rural Development in 2016-17 (as a % of total expenditure)
UP
6.9%
5.3%
TS
0.8%
5.3%
8.6%
8.7%
6.8%
6.1%
3.4%
JK
4.9%
3.4%
3.8%
HR
0.4%
5%
2.9%
7.9%
7.5%
10%
11.7%
15%
0%
AP
BR
CG
DL
GJ
KA
KL
MH
MP
OD
PB
RJ
WB
Energy
In 2016-17, the 17 states are expected to spend 6% of their total expenditure on energy. This includes
expenditure on areas such as electricity generation, distribution and renewable energy sources.
Jammu and Kashmir is expected to spend 18% of its total expenditure on energy, followed by
Rajasthan (13%) and Haryana (13%). The spending on energy includes expenditure on the Ujwal
Discom Assurance Yojana (UDAY) in case of states that have opted for the scheme.1 Figure 22
compares expenditure of the 17 states on energy in 2016-17.
As of October 2016, states which have opted to participate in the UDAY scheme are: Andhra Pradesh, Bihar, Chhattisgarh, Goa, Gujarat,
Jammu and Kashmir, Jharkhand, Haryana, Karnataka, Madhya Pradesh, Manipur, Punjab, Puducherry, Rajasthan, Uttar Pradesh and
Uttarakhand.
12
PB
1.1%
0.8%
OD
4.0%
1.6%
7.4%
11.8%
4.6%
GJ
0.2%
DL
4.8%
5.2%
2.8%
2.9%
10%
4.7%
9.9%
12.9%
20%
12.9%
18.4%
Figure 22: Expenditure on Energy in 2016-17 (as a % of total expenditure)
0%
AP
BR
CG
HR
JK
KA
KL
MH
MP
RJ
TS
UP
WB
Roads and Bridges

On an average, the 17 states are expected to spend 4% of their expenditure on roads and bridges in
2016-17. Chhattisgarh has budgted to spend the most, which accounts for 9% of its total expenditure.
This is followed by Uttar Pradesh and Delhi spending 6% of their respective expenditure. On the
other hand, Punjab (1%), Jammu and Kashmir (2%) and Andhra Pradesh (2%) are expected to spend
the lowest on roads and bridges. Figure 23 compares expenditure of states on roads and bridges in
2016-17.
6.4%
1.5%
2.7%
MP
3.3%
3.6%
MH
1.3%
3.4%
2%
2.5%
3.4%
5.0%
KL
1.6%
4%
2.1%
6%
4.3%
5.3%
8%
3.8%
10%
6.1%
9.4%
Figure 23: Expenditure on Roads and Bridges in 2016-17 (as a % of total expenditure)
0%
AP
BR
CG
DL
GJ
HR
JK
KA
OD
PB
RJ
TS
UP
WB
Police
In 2016-17, the 17 states are expected to spend 4% of their total expenditure on police. Jammu and
Kashmir is expected to spend 7% of its total expenditure on police, which is the highest among all
states. It is followed by Punjab budgeting to spend 6%. On the other hand, Karnataka has budgeted
to spend 2% of its expenditure on Police, which is the among the lowest expenditure by states.
While the police in Delhi is under the central government, the states spending on police is on a
forensic laboratory. Figure 24 compares expenditure of states on police in 2016-17.
Figure 24: Expenditure on Police in 2016-17 (as a % of total expenditure)
2.9%
4.2%
OD
2.6%
MP
3.4%
6.1%
2.8%
KL
3.0%
4.3%
2.5%
KA
0.2%
2.4%
CG
2%
3.8%
BR
2.6%
4.4%
4%
3.2%
6%
4.3%
6.6%
8%
0%
AP
DL
GJ
HR
JK
13
MH
PB
RJ
TS
UP
WB
DEFICITS AND LIABILITIES

Fiscal deficit is the excess of government expenditure over its receipts. A high fiscal deficit of a
government implies a higher borrowing requirement in a financial year. The borrowed funds may be
spent by the state for various purposes, including on development activities and interest payments.
In 2003, Parliament passed the Fiscal Responsibility and Budget Management Act (FRBM Act)
which prescribed limits for the fiscal deficit at 3%, and sought to eliminate revenue deficit. In the
following years, several states passed their respective FRBM Acts, imposing similar limits on their
borrowings. In 2015, the 14th Finance Commission recommended that states continue to maintain a
fiscal deficit at 3% of their GSDP and eliminate revenue deficit. It suggested that the fiscal deficit
limit be relaxed to a maximum of 3.5%, if states were able to contain their debt and interest payments
to specified levels. The relaxation would be allowed in the following cases: (i) 0.25% if the debtGSDP ratio of the state was under 25% in the preceding year, and (ii) 0.25% if interest payments of
the state were less than or equal to 10% of its revenue receipts in the preceding year.3
While the spending of states has grown at an average rate of 18.8% annually since 2012-13, most
states have managed to exercise fiscal discipline by keeping their fiscal deficit within the prescribed
limits. Figure 25 presents the average fiscal deficit estimates of states for the 2013 to 2017 period.
PB
RJ
TS
WB
-0.8%
-3.0%
OD
-3.4%
MH
-3.0%
MP
-2.0%
KL
-1.6%
KA
-2.5%
JK
-3.6%
-2.7%
HR
-2.7%
-3.2%
GJ
-4.4%
CG
-3.0%
BR
-2.3%
AP
-2.6%
Figure 25: Most states manage to keep fiscal deficit under 3% of their GSDP on an average (2013-17)
0%
Deficit
-1%
-2%
-3%
-4%
-5%
Fiscal Deficit (as % of GSDP)
Finance Commission Recommendation
Note: Negative numbers imply deficit.

States spend 21% of their non-debt receipts on debt servicing

States borrow money in order to finance their fiscal deficit. They are required to service the borrowed
debt by making periodic repayments of the principal amount along with the interest. In the five-year
period between 2013 and 2017, the 17 states on an average spent over 21% of their total receipts
(excluding borrowings) on debt servicing. This indicates that out of every Rs 100 of money received
by a state, Rs 21 is spent on repaying borrowings taken previously, and the remaining amount is spent
on development activities. In 2013-17, approximately 60% of this amount was for interest payment,
and the remaining 40% for principal repayment. Across the 17 states, Punjab spent the highest
proportion of its receipts on debt servicing at 70%, followed by West Bengal at 58% (Figure 26).
Figure 26: Punjab and West Bengal spend the highest share of their receipts on servicing debt (2013-17)
80%
70%
58%
60%
33%
40%
20%
19%
11%
7%
28%
26%
23%
14%
12%
24%
10%
17%
10%
12%
14%
TS
UP
0%
AP
BR
CG
DL
GJ
HR
JK
KA
Debt Repayment
KL
14
MH MP OD
Interest Payment
PB
RJ
WB
Most states have a revenue surplus in the period between 2013 and 2017
Revenue deficit is the excess of revenue expenditure (such as salary and interest payments) over
revenue receipts (such as taxes and revenue received from providing services) of the government. A
revenue deficit means that states need to borrow to meet expenses which do not create any assets.
Conversely, a revenue surplus indicates that the revenue sources of states are sufficient to meet their
expenditure requirements in a given year. A high revenue surplus indicates: (i) the state can create
capital assets; or (ii) it can pay off outstanding liabilities. While a high revenue surplus in the short
term may allow for greater spending on asset creation, such a surplus for a longer term may indicate
inadequate revenue expenditure by the state. The 14th Finance Commission recommended that states
should aim to eliminate revenue deficits. The Commission also estimated the revenue deficit that
states would incur post-devolution, and suggested that the centre compensate these states through
revenue deficit grants.3 Out of the 17 states, Andhra Pradesh and Jammu and Kashmir are expected to
receive these grants for five years, Kerala for three years, and West Bengal for two years.
As seen in Figure 27, in the period between 2013 and 2017, five states posted a revenue deficit.
Kerala on an average had a deficit of over two percent, followed by Punjab (2.1%), Haryana (1.7%)
and West Bengal (1.2%).
Figure 27: Five states post a revenue deficit on an average (2013-17)
Surplus
2%
0.8%
1%
1.7%
1.6%
1.5%
0.8%
0.5%
0.3%
0.1%
0%
Deficit
-1%
-0.1%
-0.3%
-1.2%
-2%
-1.7%
-2.1%
-2.3%
-3%
AP
BR
CG
GJ
HR
JK
KA
KL
MP
MH
OD
PB
RJ
WB
Note: Negative figures imply deficit and positive figures imply surplus.
Seventh Pay Commission may impact deficit of states A case study of Maharashtra
A large share of any states revenue receipts goes into Salaries and pensions as a % of revenue
receipts in Maharashtra
expenses on the administration. This includes
payments of salaries to current employees, and
6th Pay
60%
Commission
pensions to former employees. For example, in 201617, Maharashtra is expected to spend over one lakh
crore rupees on salaries and pensions. This constitutes 40%
approximately 47% of its revenue.
15
20%
2016-17
2014-15
2012-13
2010-11
2008-09
2006-07
2004-05
0%
2002-03
As seen in the graph, the salaries and pensions in

Maharashtra rose in 2008-09, after the
recommendations of the Sixth Pay Commission were
implemented. In 2015, the Seventh Central Pay
Commission recommended an overall increase of over
23% in pay, allowances and pensions of central
government employees. If states follow the centres
lead in implementing its recommendations, there
could be a rise in their revenue and fiscal deficits.
Sources: Maharashtra State Budget Documents; PRS.
Outstanding liabilities of states at 26% of GSDP

Outstanding liabilities refers to debt accumulated from financing the fiscal deficit in the past. Higher
outstanding liabilities may indicate a higher obligation for the state to repay loans in the coming years.
The FRBM Acts of states usually specify limits on the outstanding liabilities as a percentage of
GSDP. Typically, these limits are set at 25% of GSDP in a year. During the five-year period between
2012 and 2016, states on an average had outstanding liabilities at 26% of GSDP. As seen in Figure
28, this varied from 53% of GSDP in Jammu and Kashmir to 8% in Delhi.
Figure 28: Outstanding Liabilities of states at 26% of GSDP on an average (2012-16)
60%
53%
40%
23%
26%
20%
25%
14%
32%
30%
23%
20%
21%
23%
MH
MP
26%
20%
32%
37%
8%
0%
AP
BR
CG
DL
GJ
HR
JK
KA
KL
OD
PB
RJ
UP
WB
Sources: State Finances: A Study of Budgets, RBI; PRS.
1. The note compares states using budget documents such as Budget at a Glance, Annual Financial Statement, Department-wise Demand
for Grants, Medium Term Fiscal Policy Statement.
2. Report on the Revenue Neutral Rate and Structure of Rates for the Goods and Services Tax (GST), Ministry of Finance, December,
2015, http://www.finmin.nic.in/the_ministry/dept_revenue/report_revenue_neutral_rate.pdf.
3. Report of the Fourteenth Finance Commission, February 2015, http://finmin.nic.in/14fincomm/14fcreng.pdf.
4. UDAY (Ujwal DISCOM Assurance Yojana) for financial turnaround of Power Distribution Companies, Press Information Bureau,
Cabinet, November 5, 2015.
5. State Finances: A Study of Budgets of 2015-16, Reserve Bank of India, April 7, 2016,
https://www.rbi.org.in/Scripts/AnnualPublications.aspx?head=State%20Finances%20:%20A%20Study%20of%20Budgets.
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STATE OF STATE

States spend 30% more than centre

No change in spending on key sectors

States spend 21% of receipts on

Jammu and Kashmir

Finances of states have been changing due to (i)

This report analyses the financial position of 17

Note: Figures in lakh crore rupees. Centres expenditure includes

No significant change in spending on key sectors post 14th Finance Commission

Following the increase in tax devolution to

Figure 2: No change in state spending on key sectors

14th Finance Commission

Expenditure on education grew from 14% in

Note: Figures are as a percentage of total expenditure.

Sources: Respective State Budget Documents; PRS.

Growth in Revenue Receipts

Sources: State Finances: A Study of Budgets, RBI; Respective State

Revenue composition of states

Jammu and Kashmir (JK)

Madhya Pradesh (MP)

West Bengal (WB)

Uttar Pradesh (UP)

11% 14% 13%

13% 10% 13%

12% 10% 14%

Taxation powers in India

Sales Tax constitutes the largest share in tax revenue of states

States levy Sales Tax or Value Added Tax (VAT)

Electricity Tax and Duty, 4% Others, 3%

Other taxes for the 17 states, such as Excise Duty

Excise Duty, 12%

Goods and Services Tax

Tax Revenue Collection

Figure 8: Tax-GSDP ratio estimated to be in the range of 5% to 8% (2016-17)

Sources: Respective State Budget Documents; PRS.

Devolution of funds from the central government to states

Distribution of taxes among states

Note: Income Distance is the difference between the per

The 14 Finance Commission, in February 2015, sought

Table 1: Share of states in funds devolved by the centre

14th Finance Commission

Sources: Reports of the 13th and 14th Finance Commissions; PRS.

Sources: Respective State Budgets; PRS.

Figure 10: Central grants devolved to states grow by 20% (2012-2017)

State expenditure grew faster than central

Sources: Respective State Budget Documents; PRS.

Revenue and Capital Expenditure

Note: Capital Expenditure excludes funds spent on repayment of loans.

Expenditure across sectors

16.1% 14.3% 3.7% 4.2% 2.8%

1.0% 0.6% 1.0% 0.6%

Ujwal Discom Assurance Yojana

As seen in Figure 15, between 2014-15 and 2016-17,

Note: Data does not include Delhi.

Table 2: Expenditure on sectors as a % of total expenditure

Jammu and Kashmir

Sources: Respective State Budget Documents; PRS.

Figure 16: Expenditure on Education in 2016-17 (as a % of total expenditure)

Sources: Respective State Budget Documents; PRS.

Figure 17: Expenditure on Health in 2016-17 (as a % of total expenditure)

Sources: Respective State Budget Documents; PRS.

Welfare of SC, ST and OBCs

Sources: Respective State Budget Documents; PRS.