Which of the following factors is primarily responsible for the decline in the share of Union tax devolution to developed states in recent Finance Commission cycles?

High weightage given to per capita income distance and population

Increase in the weightage of industrial output

Mandatory increase in state-level GST collection targets

Reduction in the total divisible pool of taxes

In the context of state fiscal health, what does the 'scissors effect' refer to?

The widening gap between revenue capacity and expenditure obligations due to demographic changes

The divergence between capital expenditure and revenue expenditure

The gap between tax revenue and non-tax revenue

The conflict between state welfare schemes and central government mandates

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23 June 2026

Tamil Nadu fiscal autonomy white paper

The white paper provides specific, data-backed insights into the structural fiscal challenges of Indian states, directly relevant to UPSC themes of federalism, fiscal devolution, and government budgeting.

Notes

Tamil Nadu's fiscal white paper identifies structural weaknesses in state finances, noting that a significant portion of the fiscal deficit is used to fund revenue deficits rather than asset creation.
Approximately 60 paise of every rupee borrowed is utilized for current consumption.
State's Own Tax Revenue (SOTR) to GSDP ratio declined from 7.92% in 2011-12 to 5.45% in 2025-26.
GST accounts for 53% of the state's total tax revenue, yet collection efficiency lags behind comparable states like Karnataka and Gujarat.
Union tax devolution and grants-in-aid as a percentage of Total Revenue Receipts declined from 34.95% in 2021-22 to 25.5% in 2025-26.
Finance Commission devolution formulas, which prioritize per capita income distance and population, are cited as disadvantageous to economically developed states.
The 'scissors effect' describes the fiscal risk where a shrinking working-age population reduces tax capacity while an aging demographic increases social expenditure obligations.
87% of revenue receipts are pre-committed to salaries, pensions, interest payments, and non-discretionary obligations, limiting fiscal space for new schemes.
Power sector debt stands at ₹2.47 lakh crore, exacerbated by political rent-seeking in subsidy models.

Part of a longer story

This is day 1 of 13 in Tamil Nadu public finance and SPSU fiscal health, which has been running since 23 June 2026. Reading it whole is usually worth more than reading today alone — the exam asks how something developed.

Questions

Analyze the structural challenges faced by state governments in maintaining fiscal autonomy within the framework of the Goods and Services Tax (GST) regime. 150 words

Attempt this — 150 words in 8 min

0 / 150 words 8:00
Discuss the 'scissors effect' in the context of state-level fiscal management. How do demographic shifts and the current Finance Commission devolution criteria impact the fiscal capacity of developed states to invest in human capital and infrastructure? 250 words

Attempt this — 250 words in 11 min

0 / 250 words 11:00

Prelims

Which of the following factors is primarily responsible for the decline in the share of Union tax devolution to developed states in recent Finance Commission cycles?

In the context of state fiscal health, what does the 'scissors effect' refer to?

Syllabus

Topics

Sources

Reclaiming T.N.’s fiscal autonomy

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