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Budget 2023: States Demand Fiscal Autonomy, Review Of Sharing Formula

States have asked the central government not to reduce the borrowing limit and to keep it at 4% of state GDP from 3.5% in FY23.

<div class="paragraphs"><p>(Source: Finance Ministry/Twitter)</p></div>
(Source: Finance Ministry/Twitter)

In their pre-Budget consultation with the Ministry of Finance, states have asked for greater fiscal autonomy, a relook at the sharing formula for centrally sponsored schemes, and highlighted the proportion of cess and surcharge in gross tax revenues.

The meeting was held at the Manekshaw Centre in New Delhi and was attended by union ministers of state (finance), chief ministers, deputy chief ministers, the Lt. Governor of Jammu and Kashmir, finance ministers, ministers, and senior officers from the states and union territories, and the union government.

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Key Demands By States

Some of the top requests from states included greater fiscal autonomy and easing the borrowing ceiling. They also brought up pertinent global issues like inflation and sought central assistance for the same.

"We have unprecedented inflation... though we have spending capacity, there are bottlenecks in the supply chain. It is not clear if there will be a soft landing without a global economic recession. If it happens, then states will need extra flexibility in terms of additional compensation as well as a greater borrowing limit," said Tamil Nadu's Finance Minister P Thiaga Rajan.

States have also asked the central government not to reduce the borrowing limit to 3%, but to keep it at 4% of the state GDP. This fiscal, states had a borrowing limit of 3.5% of the gross state domestic product.

Cess and surcharge were also topics of interest. While they don't form a part of the divisible pool of taxes to be distributed to states, their share has grown over the year. Cess and surcharges were 10.4% of the gross tax revenues in 2011-12, compared to 26.7% in 2021-22.

States have requested to either phase down cess and surcharges or receive an appropriate share of the same.

Among the major demands, states wanted a relook at the sharing pattern of centrally sponsored schemes to ease the burden on the state exchequers. 

According to Kerala's Finance Minister KN Balagopal, following the rationalisation of centrally sponsored schemes in 2016 into "core, core of the core, and optional schemes", the sharing pattern of these schemes has changed.

Schemes that used to have a 75:25 sharing pattern, favouring states, were included in 'core schemes', which have a 60:40 sharing pattern, adding further burden on the state exchequer.

Release of pending dues of GST compensation for the period of April through June 2022 was also sought by various states.

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Additional State-Specific Requests


  • Increase in budget allocation for the north-eastern states and an increase in the capital assistance scheme as well.


  • A Rs 500-crore development package for sixth schedule areas.

  • Micro solar grids in villages for electricity access.

  • Better connectivity and continuation of interest-free capex loans.

Himachal Pradesh

  • Connectivity by rail and air for promoting tourism. 

  • The GST on packaging materials, used primarily in the state by apple growers, should be reduced from 18% to 12%.


  • Release funds for the Old Pension Scheme, which was renewed by the state.

  • The balance of GST compensation for the period April to June 2022. The state has only received Rs 500 crore out of the total amount of Rs 1,875 crore owed to it as GST compensation.

  • Fix different royalties for different grades of iron ore and coal.

Tamil Nadu

  • Expansion of the PLI scheme to other sectors, such as leather and non-leather footwear.

  • Emergency credit line guarantee scheme for micro, small and medium enterprises in the garment sector with 20% additional collateral-free credit in the next budget.

  • Release of state-specific grants recommended by the 15th Finance Commission in an untied way.

Andhra Pradesh

  • State-specific topics included spillover from the Andhra Pradesh reorganisation, the state's Polavaram project, backward area development, and rail and road projects linking Andhra Pradesh to Hyderabad.

  • The state asked the central government to continue the special assistance for capex spend and include state-promoted renewable energy projects in the consideration for green bonds.

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