Signs of a weakening public sector

Source: The post is based on the article “Signs of a weakening public sector” published in the Business Standard on 8th February 2023.

Syllabus: GS 3 – Government Budgeting.

Relevance: About fiscal relations between the Centre and states and PSUs.

News: The Budget reveals the nature of the Centre’s financial engagement with public sector undertakings (PSU).

About Centre’s fiscal relations with states

The Centre’s fiscal relations with states are principally governed by the recommendations of the Finance Commission. Accordingly, states have a 41% share in the total taxes (Only in net shareable tax proceeds but not in cesses and surcharges) collected by the Union government.

In the last few years, the share of collections from various cesses and surcharges has gone up steadily. From about 5% of the Centre’s gross tax collections in 2017-18 to about 13% in the revised estimate of the Budget this year. Hence, the State’s share in the Centre’s gross tax collections has declined to 30-33%.

How the budget responded to Cess and Surcharges?

Cesses and surcharges in 2023-24 are expected to see one of the lowest increases in recent years. This is because, a) The share of cesses and surcharges in the gross domestic product (GDP) is declining, for the first time in the last three years, to 1.35%, b) The super-rich tax has come down from 42.7% to 39% because the surcharge on it has been slashed from 37% to 25%.

Why the states are happy with the recent budget?

1) The revenue hit from cess and surcharge reduction will be borne entirely by the Centre and, therefore, would not affect the amount of tax transfer to the states, 2) States will witness an increased allocation of capital expenditure advances by 30%, 3) The states get assistance from the Centre by way of grants and loans. This is not reduced in the recent budget.

Why the PSUs are happy with the recent budget?

The budget for 2023-24 has been generous with its capital expenditure. A large chunk of its capital outlay would be routed through capital support to PSUs. For instance, in 2022-23, PSUs accounted for over half of the government’s capital expenditure, up from a share of 42% in 2021-22.

What are the challenges faced by PSUs recently?

a) There is a decline in the share of the PSUs’ own contribution to their total capital outlay on projects. Hence, PSUs are increasingly becoming more dependent on the Centre to meet their capital expenditure requirements. For instance, the gradual weakening of the PSUs is clearly visible from the state of the Indian Railways.

In 2023-24, Railways would be helped by Rs 2.4 trillion of capital support from the Centre. But its own contribution to its capital projects will decline to 18%.

b) There is also a lack of accountability in ensuring a decent return on such investment.

Overall, the government must expedite its plan for asset sale and privatisation.