In 2018-19, states are expected to spend 72% more than the central government, a significant change from 46% in 2014-15 (last year of the 13th Finance Commission). Thus, much of the expenditure that affects citizens is decided at the level of the state. Meanwhile, decisions on receipts are getting centralised at the level of the centre with the implementation of the GST. In this report, we discuss recent developments that affect finances of the states as well as the trends in the last eight years.

GST reduces states flexibility on their receipts: In 2018-19, transfers from the centre are estimated to make 48% of states’ revenue. With implementation of GST (tax rates decided by the GST Council), the autonomy of states is expected to reduce on an additional 17% of their revenue. That is, the decision-making power of states will be limited to 35% of their revenue (page 2). However, several states have seen a boost in revenue as the centre has guaranteed 14% annual growth on the taxes subsumed by GST for a period of five years.

Loss of revenue with GST on petroleum products: The GST Council has the mandate to decide when to include petroleum products within the purview of GST. Given the possibility of reduction in tax rates from the existing higher rates (over 20% sales tax in 25 states and about 24% excise duty on petrol), combined with the availability of input tax credit, there could be significant revenue loss for many states when these products are included under GST (page 3).

15th Finance Commission: When recommending the criteria for devolution of central taxes to states for the period 2020-25, the 15th Finance Commission will use population data of 2011, instead of 1971 data. This could reduce the share of some states that have made efforts for population control. However, such reductions could be mitigated through incentives for reducing population growth. The Commission will also examine the necessity of revenue deficit grants, impacting states that depend on them to finance their revenue expenditure (pages 4 and 5).

Implications of the 7th Pay Commission: Some states have implemented pay hikes after the 7th Pay Commission increased pay and allowances for central government employees. This has increased their revenue expenditure by 25% in 2017-18, therefore impacting the fiscal balance of these states. Other states may also see a spike in their expenditure if they follow suit (page 6).

Impact of agricultural distress: Farm distress has led to declaration of farm loan waivers by eight states, amounting to Rs 1,77,241 crore. Borrowings of such states can increase due to these waivers. Further, the sugar sector is under stress with dues of sugarcane farmers pending with many mills; if states prepare a rescue package, it will increase fiscal pressure on states

States to have limited flexibility on 65% of their revenue with the implementation of GST

States primarily depend on two sources for their revenue – their own revenue and central transfers. The former indicates revenue generated by states on their own, while the latter consists of receipts from devolution of union taxes and grants-in-aid from the centre. In 2018-19, 52% of the revenue receipts of states is estimated to come from their own revenue, and the remaining 48% of the revenue in the form of transfers from the centre. Since central transfers are outside the jurisdiction of the states, they do not have the authority to make decisions regarding a significant part of their revenue.

With the introduction of GST, many indirect taxes levied by the states have been replaced. While these taxes were completely under the control of each state, GST rates are now decided by the GST Council. This implies that states have limited flexibility in making decisions regarding tax rates on goods and services. Therefore, higher reliance on GST receipts for revenue reduces states’ autonomy, as these receipts depend on tax rates decided by the GST Council. Though GST limits the flexibility of states, the centre’s guarantee of 14% annual growth in this tax revenue, for a period of five years, has boosted states’ revenue. In case of less than 14% growth, states will receive compensation from the centre. In 2018-19, 15 states expect to receive such compensation grants (see Box 1 on page 16).

GST revenue of a state can be categorized into three components: (i) state’s own GST revenue, (ii) devolution of centre’s GST revenue, and (iii) compensation, if any. While the first component comes under state’s own revenue, the other two components form a part of central transfers. In 2018-19, central transfers are estimated to make 48% of states’ revenue. With the implementation of GST, the autonomy of states is expected to reduce on an additional 17% of their revenue. This revenue is estimated to come from their own GST revenue (with rates being decided by the GST Council). Thus, effectively, states’ have limited decision-making powers on generation of 65% of their revenue.

Across states, the figures vary. The dependence on these sources is more than 85% of the revenue in the case of Bihar, Jammu and Kashmir, and the north-eastern states (except Assam). However, this is more so because of their significantly higher reliance on central transfers. States which have witnessed comparatively larger limitations on their flexibility because of more reliance on GST for their own revenue include Delhi, Haryana, Maharashtra, and Punjab. For instance, Maharashtra has limited control over 26% of its revenue, which comes from central transfers. Further with GST, the state’s control will get limited on an additional 32% of its revenue, stretching it to 58%.

Note: State’s own GST revenue comes from the levy of SGST, and its 50% share of the IGST revenue. Rest of the IGST revenue and the revenue generated by levying CGST is devolved by the central government, as per the recommendations of the 14th Finance Commission.

Since the 2018-19 budgets are the first to be presented after the introduction of GST in July 2017, there is lack of uniformity in budget documents across states on reporting individual GST components, especially compensation. For instance, some states have included compensation in their tax revenue, such as Andhra Pradesh and Gujarat, where as some have shown it as central grants, such as Bihar and Karnataka. For uniformity, we have considered compensation as a part of central grants, and thus have adjusted own tax revenue and central grants of some states.

At present, petrol and diesel are not within the GST structure. Instead, they are subjected to excise duty, levied by the centre, and sales tax/value added tax (VAT), levied by the states. In addition, some states also levy additional surcharge/cess. Petroleum products are used as inputs for production or supply of other goods and services. Excluding them from GST results in cascading of taxes.

The GST Council is mandated to recommend the date from which GST will subsume the existing taxes on these products. While this could resolve the issue of cascading of taxes, it may have an adverse impact on the revenue of states. Assuming petrol and diesel are taxed at the highest slab of 28% plus cess, with no additional levies, SGST and CGST would be levied at 14% each, with additional cess.

In the current scenario, 25 out of 27 states levy effective sales tax/VAT of 20% or more on petrol (Figure 4). With levy of SGST at 14%, the state tax rate on petrol will reduce to half or more of the currently effective rate for seven states, reducing the resulting revenue earned from it.

For example, currently, Maharashtra effectively levies 36% VAT on a litre of petrol. In comparison, with levy of GST at present rates, it would generate revenue by levying 14% SGST, which is 22 percentage points lower than the present rate. In the case of diesel, this reduction would range from 5%-12% for 11 states. As a result, states could witness large reductions in their own tax revenue.

Note: The rates shown for Maharashtra are averages of the rates levied in Mumbai-Thane region and the rest of the state.

In addition to sales tax revenue, states also receive excise duty revenue from taxation of petroleum products. 42% of the excise duty revenue generated by the centre is devolved to the states as per the recommendations of the Finance Commission. At present, excise duty is levied on petrol and diesel at Rs 9.98/ litre and Rs 5.83/ litre, respectively.[1] Note that this excludes the road and infrastructure cess[*] of Rs 8/ litre, whose revenue is not shared with the states.

These excise duty rates, calculated on the base price paid by oil companies for petrol and diesel[†], are about 24% and 12%, respectively. Thus, if GST is levied on petrol and diesel, centre’s revenue would come from a levy of 14% CGST, which is ten percentage points lower than the present rate in case of petrol. In the case of diesel, there would be an increase of two percentage points. This will reduce the overall divisible pool of centre’s tax revenue generated from petroleum products, and thus, will affect each state’s devolution receipts.

Also, when petroleum products are brought under GST, input tax credit will be allowed on the supply of these products. Input tax credit is given to suppliers for the taxes paid by them on the inputs that they have used in the course of their business (and not for self-consumption).

At present, suppliers (such as transport operators or industries that use diesel to generate electricity), who pay taxes on the petroleum products that they use as inputs, are unable to claim the benefits of input tax credit on these products. As a result, the government need not refund the taxes that suppliers have paid on petroleum products used in the course of their business. When GST is levied on these products, taxpayers will be eligible to receive input tax credit, which might increase the loss to the exchequer.

What is Aurora? An Aurora is a display of light in the sky predominantly seen in the high latitude regions (Arctic and Antarctic). It is also known as a Polar light.

Types: There are two types- the aurora borealis and aurora australis – often called the northern lights and southern lights.

Where do they occur? They commonly occur at high northern and southern latitudes, less frequent at mid-latitudes, and seldom seen near the equator.

Colors: While usually a milky greenish color, auroras can also show red, blue, violet, pink, and white. These colors appear in a variety of continuously changing shapes. Science behind their occurrence: Auroras are a spectacular sign that our planet is electrically connected to the Sun. These light shows are provoked by energy from the Sun and fueled by electrically charged particles trapped in Earth’s magnetic field. The typical aurora is caused by collisions between fast-moving electrons from space with the oxygen and nitrogen in Earth’s upper atmosphere.

The electrons—which come from the Earth’s magnetosphere, the region of space controlled by Earth’s magnetic field —transfer their energy to the oxygen and nitrogen atoms and molecules, making them “excited”. As the gases return to their normal state, they emit photons, small bursts of energy in the form of light.

When a large number of electrons come from the magnetosphere to bombard the atmosphere, the oxygen and nitrogen can emit enough light for the eye to detect, giving us beautiful auroral displays.

Where do they origin? They origin at altitudes of 100 to more than 400 km. Why do auroras come in different colors and shapes? The color of the aurora depends on which gas — oxygen or nitrogen — is being excited by the electrons, and on how excited it becomes. The color also depends upon how fast the electrons are moving, or how much energy they have at the time of their collisions.

High energy electrons cause oxygen to emit green light (the most familiar color of the aurora), while low energy electrons cause a red light. Nitrogen generally gives off a blue light.

The blending of these colors can also lead to purples, pinks, and whites. The oxygen and nitrogen also emit ultraviolet light, which can be detected by special cameras on satellites.

Effects: Auroras affect communication lines, radio lines and power lines. It should also be noted here that Sun’s energy, in the form of solar wind, is behind the whole process.

About PRISMA: PRISMA (an Italian acronym for Hyperspectral Precursor of the Application Mission) is designed to provide information about environmental monitoring, resources management, pollution and crop health.

The satellite includes a medium resolution camera that can view across all visual wavelengths, as well as a hyperspectral imager that can capture a wider range of wavelengths between 400 and 2500 nanometers.

The satellite will operate in a sun-synchronous orbit, meaning that it circles the Earth in such a way that the sun is always in the same position as the satellite takes pictures of the planet below.

The mission can provide a unique contribution to the observations of natural resources and in the study of key environmental processes, such as interaction between atmosphere, biosphere and hydrosphere, observation of global climate change and effects of human activities ecosystems.

What is it? Langkawi International Maritime Aero Expo (LIMA-2019) is being held in Langkawi, Malaysia. Indian Air Force is participating in the Maritime Aero Expo for the first time, during which it will showcase its indigenously developed LCA fighter aircraft.

Context: An advisory panel to the World Health Organization has called for the creation of a global registry to monitor gene-editing research in humans.

What necessitated this? Gene editing holds incredible promise for health, but it also poses some risks, both ethically and medically.

The World Health Organization (WHO), an agency of the United Nations, is trying to sort out how scientists could responsibly alter human genomes in their labs — an effort to prevent the next He Jiankui from performing unpublicized genetic experiments on human subjects.

The recommendations of the 18-person committee, which was established following news late last year that Chinese scientist He Jiankui had carried out human gene editing in secret, are aimed at improving transparency and responsibility in the field.

What are Genes and what is gene- editing? Genes contain the bio-information that defines any individual. Physical attributes like height, skin or hair colour, more subtle features and even behavioural traits can be attributed to information encoded in the genetic material.

An ability to alter this information gives scientists the power to control some of these features. Gene “editing” — sometimes expressed in related, but not always equivalent, terms like genetic modification, genetic manipulation or genetic engineering — is not new.

What is CRISPR-Cas9? The clustered, regularly interspaced, short palindromic repeats, or CRISPR/CRISPR-associated protein 9 (Cas9) (CRISPR-Cas9) system has revolutionised genetic manipulations and made gene editing simpler, faster and easily accessible to most laboratories.

CRISPR technology is basically a gene-editing technology that can be used for the purpose of altering genetic expression or changing the genome of an organism.

The technology can be used for targeting specific stretches of an entire genetic code or editing the DNA at particular locations. CRISPR technology is a simple yet powerful tool for editing genomes. It allows researchers to easily alter DNA sequences and modify gene function.

Its many potential applications include correcting genetic defects, treating and preventing the spread of diseases and improving crops. However, its promise also raises ethical concerns.

How it works? CRISPR-Cas9 technology behaves like a cut-and-paste mechanism on DNA strands that contain genetic information.

The specific location of the genetic codes that need to be changed, or “edited”, is identified on the DNA strand, and then, using the Cas9 protein, which acts like a pair of scissors, that location is cut off from the strand. A DNA strand, when broken, has a natural tendency to repair itself.

Scientists intervene during this auto-repair process, supplying the desired sequence of genetic codes that binds itself with the broken DNA strand.

Concerns: Tampering with the genetic code in human beings is more contentious. Leading scientists in the field have for long been calling for a “global pause” on clinical applications of the technology in human beings, until internationally accepted protocols are developed.

Ethical challenges: Bioethicists expressed concern over the clinical application of such research. These are still early days in a new frontier of genome engineering. Bioethicists fear abuse of gene editing, not just by misguided governments but also by the private sector preying on a parent’s desire to create a perfect child.

It can create unforeseen changes in the genome which are undesirable. It has also been ethically questioned whether editing gene to create babies that parents desires would make them more like commodities. Safety: Due to the possibility of off-target effects (edits in the wrong place) and mosaicism (when some cells carry the edit but others do not), safety is of primary concern.

Informed Consent: Some people worry that it is impossible to obtain informed consent for germline therapy because the patients affected by the edits are the embryo and future generations. Researchers and bioethicists also worry about the possibility of obtaining truly informed consent from prospective parents as long as the risks of germline therapy are unknown.

Justice and Equity: As with many new technologies, there is concern that genome editing will only be accessible to the wealthy and will increase existing disparities in access to health care and other interventions. Some worry that taken to its extreme, germline editing could create classes of individuals defined by the quality of their engineered genome.

Way ahead: This CRISPR technology is indeed a path-breaking technology, to alter genes in order to tackle a number of conventional and unconventional problems, especially in the health sector. However, experiments and tests to validate its use must be subjected to appropriate scrutiny by the regulators, and their use must be controlled to prevent commercial misuse.