Devolution of taxes and India’s economic recovery

The Centre has decided to release INR 95,082 crore to States as tax devolution amount on 22nd November. So what does tax devolution even mean and what does this decision entail?

Let’s find out:

What is tax devolution?

Let’s start from scratch. India is a quasi-federal country. This means although we have a Centre-State structure, the centre holds more power than the states. This also translates into the economic sphere. The states are dependent on the centre for a large chunk of their financial resources. Devolution is one of the ways through which states receive money from the central government. It is basically the state’s share of taxes from the Gross Tax Revenue.

The 15th finance commission has decided that states will receive 41% from the divisible tax pool for 2021-22 to 2025-26. In other words, states will receive 41% of the Gross Tax Revenue.

Now it must be remembered that devolution of taxes is not the only way through which states receive resources from the centre. States also receive monetary support via various scheme related transfers, grants from the Finance Commission and so on.

What will this transfer mean?

So, the devolution of taxes is usually done via monthly instalments of INR 47, 541 crores. The centre has decided to release another INR 47,541 crore this month so that states have more resources in their hand. This advance payment will be adjusted in March 2022.

A meeting was called upon to discuss India’s economic growth post the pandemic and how to push it towards double digits. In this meeting between the Centre and the state representatives, many states requested the Finance Minister to increase the capital spending capacity for states.

A close collaboration between the centre and states will be instrumental in achieving the goal of double-digit growth figures. And in this mission, an increased amount of resources in the hands of the states would enable them to invest more in infrastructure and growth. This will also allow the states to invest in those sectors which were more affected than others during the pandemic for example the hospitality and tourism sector.

India’s economic recovery post-pandemic

The pandemic was a huge blow not only to the Indian economy but the global economy in general. The Indian economy witnessed a significant fall in its real GDP in 2020. However, since the ebbing of the second wave of the pandemic, India’s economy has been making a steady yet cautious recovery. In the first quarter of 2021, India witnessed a  20.1% increase in its GDP which brought the economy close to its pre-pandemic level. The covid 19 vaccination drive has been one of the major contributors to restoring the growth. And in the latter part of the year, the festive season has been a similar stimulus.

While organisations like Ficci and Ftech have forecasted a robust growth rate for the Indian economy in the near future, it is important to tread cautiously. Agricultural growth and rural demand are having a positive effect on the economy. However, the impact of the pandemic on sectors like hospitality and tourism continues to have a multiplier effect.

There is no doubt about the fact that India is surely on a steady path of recovery. However, it is important for us to take an optimistic yet judicious approach while analysing and understanding this recovery and growth.