What is State Finances?
Historical Background
Key Points
8 points- 1.
Revenue Sources: Comprise State's Own Tax Revenue (e.g., State GST, Stamp Duty & Registration Fees, State Excise, Motor Vehicle Tax, Land Revenue, Electricity Duty) and State's Own Non-Tax Revenue (e.g., fees, fines, interest receipts, dividends).
- 2.
Central Transfers: States receive a share in Central Taxes (vertical and horizontal devolution as per Finance Commission recommendations) and Grants-in-Aid (Statutory under Article 275 and Discretionary under Article 282).
- 3.
Expenditure: Categorized into Developmental (e.g., education, health, infrastructure, agriculture) and Non-Developmental (e.g., salaries, pensions, interest payments, administrative expenses).
- 4.
Borrowing: States can borrow from the market, financial institutions, and the central government, subject to constitutional limits and conditions (Article 293).
- 5.
Fiscal Indicators: Key metrics include Fiscal Deficit, Revenue Deficit, Primary Deficit, and Debt-to-Gross State Domestic Product (GSDP) ratio, which indicate the state's fiscal health and sustainability.
- 6.
Budgeting: Each state government presents an annual budget (Annual Financial Statement) to its legislature, outlining its estimated revenues and expenditures for the upcoming fiscal year.
- 7.
Financial Accountability: State Legislatures approve budgets, and the Comptroller and Auditor General (CAG) audits state accounts to ensure financial propriety and accountability.
- 8.
State Finance Commissions: Established under the 73rd and 74th Constitutional Amendments to review the financial position of Panchayats and Municipalities and recommend measures to improve their finances.
Visual Insights
Understanding State Finances
Key components and concepts related to State Finances in India.
State Finances
- ●Revenue Sources
- ●Expenditure
- ●Constitutional Framework
- ●Key Institutions
Evolution of State Finances in India
Key milestones in the evolution of state finances in India.
State finances have evolved significantly since independence, with increasing decentralization and reforms.
- 1951First Finance Commission established
- 1991Economic Liberalization
- 2003FRBM Act enacted
- 2017GST implemented
- 202115th Finance Commission Report
- 2026Andhra Pradesh targets ₹308 lakh crore economy
Recent Developments
6 developmentsImplementation of GST significantly altered state tax revenue structure, subsuming many state taxes and creating a new revenue-sharing mechanism.
COVID-19 pandemic led to increased state borrowings, fiscal stress, and temporary relaxation of FRBM targets.
Recommendations of the 15th Finance Commission on vertical and horizontal devolution, including criteria like demographic performance and tax effort.
Increased focus on capital expenditure by states to boost economic growth and infrastructure development.
Debates on the extent of fiscal autonomy for states, especially post-GST, and the impact of central schemes on state finances.
States adopting their own FRBM Acts to ensure fiscal discipline and debt sustainability.
This Concept in News
2 topicsAndhra Pradesh aims for ₹308 lakh crore economy by 2047
12 Feb 2026This news highlights the critical role of State Finances in achieving economic development goals. (1) It demonstrates how a state's financial vision and planning are essential for setting ambitious targets like a ₹308 lakh crore economy. (2) The news applies the concept of State Finances by showcasing how Andhra Pradesh intends to manage its resources and prioritize sectors to achieve its goals. (3) It reveals the importance of a state's financial health and its ability to attract investment and generate revenue. (4) The implications of this news for the concept's future are that states will need to adopt innovative financial strategies and focus on sustainable economic growth to achieve their development goals. (5) Understanding State Finances is crucial for analyzing this news because it provides the framework for evaluating the feasibility and sustainability of Andhra Pradesh's economic vision. Without this understanding, it's impossible to assess whether the state's plans are realistic and achievable.
Finance Commission Report: Tax share changes for poll-bound states
9 Feb 2026The news about the 16th Finance Commission's report highlights the dynamic nature of fiscal federalism and its impact on State Finances. (1) This news demonstrates how the Finance Commission's recommendations directly influence the financial resources available to states. (2) The changes in tax shares for poll-bound states raise questions about the criteria used for allocation and whether political factors play a role. This challenges the ideal of objective and equitable distribution. (3) The news reveals the ongoing tension between the need for fiscal autonomy for states and the central government's role in ensuring balanced regional development. (4) The implications of this news for the future include potential shifts in state government priorities and development strategies, depending on their revised revenue streams. (5) Understanding State Finances is crucial for analyzing this news because it provides the context for interpreting the significance of tax devolution and the impact on state budgets. Without this understanding, it's impossible to assess the potential consequences of these changes on state-level development and governance.