In India, the Central Government collects most of the major taxes (like Income Tax and Corporation Tax). According to Article 280 of the Constitution, a Finance Commission is appointed every five years to decide how much of this tax money should be shared with the State Governments. Currently, the 15th Finance Commission has recommended that 41% of the central pool of taxes be given to the States.

State Development Loans (SDLs) are debt securities issued by State Governments to manage their budget deficits. They are similar to Central Government Dated Securities but are issued by States. States borrow this money from the open market (banks, insurance companies) through auctions conducted by the Reserve Bank of India (RBI).

When a government presents its budget, it gives ‘Budget Estimates’ (projections). Later, mid-year, it provides ‘Revised Estimates’ (RE) based on actual income and spending so far. RE is considered a more realistic reflection of the state’s financial health than the initial budget plan.

The 2020-21 pandemic led to national lockdowns which stopped most economic activities, reducing tax collections for both Centre and States. At the same time, States had to spend huge amounts on healthcare and relief. Since the Centre’s own collections were low, the amount of money it could share (devolution) with States also decreased significantly.

When a government borrows money directly, it shows up in its budget deficit. However, sometimes governments ask their companies (PSUs) or special organizations (SPVs) to borrow money on their behalf. This is called ‘off-budget borrowing’. The Centre has recently started including such borrowings in the State’s total debt limit to ensure more transparency.

The ‘Divisible Pool’ consists of all taxes except cesses and surcharges. In recent years, the Centre has increased the proportion of revenue it collects through cesses (like the GST Compensation Cess or Health and Education Cess). Since these are not part of the divisible pool, the ‘effective’ share States receive is often much lower than the 41% recommended by the Finance Commission.

Before GST, States had more power to collect their own indirect taxes (like VAT). GST is a ‘destination-based’ tax, meaning revenue goes to the State where the goods are consumed, not where they are manufactured. This often hurts industrialised States (producers) while benefiting States with large populations (consumers).

Governments spend money in two ways: Revenue Expenditure (paying salaries, interest, and welfare - consumed immediately) and Capital Expenditure (Capex - building infrastructure). If too much borrowed money is used for revenue expenditure, less is available for Capex, which is harmful because only Capex leads to long-term economic growth and jobs.

GSDP stands for Gross State Domestic Product. It is the total value of all finished goods and services produced within a State in a specific period. Economists use the ‘Debt-to-GSDP’ ratio to check if a State’s debt is under control; if debt grows much faster than GSDP, the state may struggle to pay it back.

Sharing of taxes happens in two steps: ‘Vertical Devolution’ (Centre to States) and ‘Horizontal Devolution’ (dividing that amount among individual States). The Finance Commission uses criteria like population, area, forest cover, and ‘Income Distance’. States that collect taxes better argue they should get more (‘Tax Effort’), while poorer states need more support.