The dog-fight between the Centre and the states on financial resource sharing is moving toward a deeper and bigger crisis that would have catastrophic consequences. This is because the Bharatiya Janata Party-led government at the Centre has chosen to brawl over money rather than coordinate with states to manage the health crisis and its effect on peoples’ lives.
By opting to effectively abandon states and asking them to find their own solutions to the difficulties following the pandemic and the lockdown, the Centre has opted for a political strategy to basically insulate itself from all responsibility.
It is obvious that a 90% revenue shortfall and a 13% increase in expenditure will make a mess of any budget. The 23.9% decline in GDP (gross domestic product) growth in the first six months of 2020-2021 confirms the disaster that has hit India. The effect is not merely economic; it impacts the lives of every child, woman and man in the country, squeezing the quantity and quality of public goods, services and support.
Economic contraction has hurt revenue collection at the Centre and in the states. GST (goods and services tax) collections, excise and sales tax collections are all down, triggering a ripple that is hitting the states hardest. The impact is disproportionate as states also have to spend on managing the pandemic and its consequences.
The overdue Rs 2.35 lakh crore for GST, that Union finance minister Nirmala Sitharaman has now refused to pay to states states, would in any case have been a palliative, not a cure. About 20% of state revenues come from their share in GST collections. Like the Centre’s budget, state budgets, too, have been overset by the COVID-19-induced lockdown, swamping most economic activity, education, mobility and social life.
The degree of distress of the states is evident in the pre-GST Council meeting pitch by Sushil Modi, Bihar’s Deputy Chief Minister and a BJP leader, who heads the ministerial panel on Integrated GST. He said: “It is the moral responsibility of the Centre to help the states.”
But, Sitharaman’s excuse that the global health crisis was an “Act of God” and, therefore, the Centre did not have the means to compensate the states is a brazen shirking of responsibility. The Centre’s financial distress is exactly the same as that of the states. No state has been granted divine protection.
Maharashtra, India’s richest state, anticipates a 40% shortfall in revenue collection in 2020-2021. Its collections are likely to drop to Rs 2.1 lakh crore from a budgeted Rs 3.5 lakh crore. Karanatka is in the same boat, as are most other states.
Spending by the states to manage the public health crisis had shot up, even as revenue has declined. The response of state governments has varied; some have cut salaries, stopped spending on road construction and maintenance. But welfare costs, including providing free or heavily subsidised food grains to returning migrant families has risen. While the data on this has not been updated recently , going by the Centre’s claim that its spending has gone up by 13%, it is obvious that states would be spending more as first responders to people’s distress.
As first responders to people’s needs, which the Centre is not, it is the states that are spending on adding healthcare infrastructure and facilities to handle the critical care needs of thousands of infected patients.
Without money, the ability of the states to respond to the public health crisis will get further crippled. In pandemic times, the financial distress of states will have disastrous consequences on the lives and livelihoods of millions of people who need access to free or low-cost healthcare as a well as to income-generating opportunities that can be only created by a nationwide stimulus strategy. Hand-outs of Rs 1,000 for every migrant thrown out of work in states like Uttar Pradesh or heavily subsidised or even free distribution of staples is not a panacea.
The steep drop in India’s revenue collection is not the end of the story for the states. Most states receive funds from the Consolidated Fund of India, which makes up about 52.5% on average of the revenue of state budgets. The difference is that whereas there is no revenue for the Centre to collect, the states face exactly the same shortfalls in revenue collection. Add to this the Centre’s denial of guaranteed funds, like GST compensation.
The cost of managing the pandemic for the states has meant that financial resources from every available source, including maxing out of borrowings from Reserve Bank of India, the market and future receipts have been pretty much exhausted in the past six months.
Kerala’s finance minister, Thomas Isaac, in a recent interview said his state was facing a 30-40% drop in revenue in 2020-2021. Kerala had maxed out on borrowings and reallocated financial resources from development to cope with the massive outlays required to manage the ballooning costs of healthcare and relief to families affected by job losses due to the lockdown.
Regular revenue collection by the states from alcohol, petro goods, tobacco has also shrunk because consumption has declined. States were already in serious financial difficulties in 2019-2020. Maharashtra’s fiscal deficit was down by Rs 90,000 crore. If the richest state had a staggering fiscal deficit before the pandemic, then the depth of the crisis for other states can be easily imagined.
The Centre’s strategy of grandstanding on how much it allocated for tiding over the distress adds is only a small proportion of what the states actually need. A paltry Rs 11,090 crore to states for disaster management, another Rs 17,000 crore for immediate spending at the onset of the public health crisis, is nowhere near what the states have spent and need to continue spending as the country witnesses a steep rise in the number of COVID-19 cases.
The Centre’s recommendation to states to borrow their way out of the economic crisis is more of a problem than a solution. A state that borrows now will have to pay interest later, which means that a lot of its future revenue will have to be committed to meet the cost of servicing debt. With revenue collection tapering off, states are not going to be able to borrow their way out. The 2% extension on the existing 3% of Gross State Domestic Product borrowing limit for states has not worked. The conditions for the borrowing, seen as encroachment on their power, have put off states.
Opposition-ruled states, and even states like Bihar, where BJP is a partner in power, have indicated that the Centre should borrow the money and pay for it out of the corona cess. The argument is that this borrowing will not upset the requirements of the Fiscal Responsibility and Budget Management Act. The concern in some quarters that if the Centre borrows the money on behalf of the states it would affect the credit rating of India is a lame excuse. As the fifth largest economy in the world, India should be able to borrow its way out of the immediate revenue crisis, because the Centre is itself saying that there will be a recovery soon.
It would appear that the Centre’s reluctance to borrow for the states and its refusal to fund a stimulus package that boosts demand is an indirect admission of an apprehension over economic recovery as the country gradually reopens. The conversation around the ‘V’ shaped recovery that has started is silent on just how deep the ‘V’ really is. The GDP numbers released on Monday are early numbers; the actual state of affairs will take time to reveal itself as data on how the informal sector has done is not available as yet.
The strategy of the Narendra Modi government to insulate itself from everyday management of the crisis is similar to the one adopted by the Donald Trump administration in United States. It is the state governments that are held to account by voters, who are facing job losses, reduced earnings, etc. So, by positioning itself as a provider and, by default, turning states into bunglers, the BJP-led government seems to using disaster in anticipation of electoral gain.
The writer is a freelance journalist. The views are personal.