Covid-19 crisis: Imposing a financial emergency can be useful

The key issue in a financial emergency is the provision for govt employees' salary cut

On March 26, the Centre for Accountability and Systemic Change (CASC), a governance reform outfit, filed a petition with the Supreme Court, seeking that the Centre must declare a financial emergency in view of the country-wide lockdown imposed after the COVID-19 outbreak. This was a public interest litigation that pleaded with the apex court that it must direct the Centre to use the financial emergency provisions under Article 360 of the Indian Constitution.

Two days earlier, Finance Minister Nirmala Sitharaman had ruled out the imposition of a financial emergency, while announcing the government’s decision on March 24 to extend the deadlines under various statutory rules and procedures for individuals and companies. “No move to impose financial emergency as was claimed by some reports,” Sitharaman said while addressing the media.

There was, however, a lot of speculation that the Narendra Modi government might consider imposing a financial emergency to deal with the challenges of providing more funds to help the economy overcome the adverse impact of COVID-19. The imposition of a financial emergency was also being linked to the stimulus package that the Modi government was expected to announce just like so many other countries had rolled out similar measures in the last few days.

But what does a financial emergency entail? 

The Indian Constitution has provided for three kinds of emergencies. Article 352 allows the government to impose a national emergency if it believes that there are serious threats to the security of the country or any of its territories due to war, external aggression or armed rebellion.

Under such an emergency, the Centre assumes all executive, legislative and financial powers and it can frame laws on subjects that are the domain of state governments under the State List. All fundamental rights stay suspended except Article 20 (right to protection against conviction of offences) and Article 21 (right to life). Such an emergency has so far been imposed on three occasions — at the time of India’s war with China in 1962 and Pakistan in 1971, and on grounds of internal disturbances in 1975.

The second kind of emergency can be imposed specifically for states under Article 256, under which President’s rule can be imposed on any state if there is a failure of the constitutional machinery. Such emergencies have been imposed on many states over the last many years. These are revoked once an elected government can be formed in the state.

A financial emergency under Article 360 can be imposed by the President if he or she is satisfied that the country’s financial stability is threatened. Such a decision has to be laid before both the Houses of Parliament and they have to approve it by passing a resolution within two months. Under its provisions, the Centre can impose norms of financial propriety on itself and all the state governments, requiring their budgets too to be passed by it. So far, no government has imposed a financial emergency in the country.

The most significant power under Article 360 is that the Centre can reduce salaries and allowances of those serving the government at the Centre or in the states, including judges of high courts and the Supreme Court. It is this provision which can provide substantial cushion for central finances if and when the need arises to provide a stimulus without completely abandoning fiscal discipline.

Salaries and allowances account for an estimated 25 per cent of the total expenditure of all the states. For 2019-20, this would be about Rs 9 trillion. For the Centre, the civilian employees’ salary and allowances are estimated at Rs 2.5 trillion.

Thus a financial emergency will give the Centre the flexibility of imposing a cut in the total salary budget of about Rs 11.5 trillion for all central and state government employees. A 10 per cent cut in salaries will give the Centre a saving of about Rs 1.15 trillion.

But it will also be a hard decision, adversely affecting the popularity of the government. 

No government employee will like the pay cut and each of them will remember it with a lot of pain. But at a time when many private companies are letting their employees go, shutting down their operations which are leading to job losses and even cutting wages, the salary reduction provision of the financial emergency is certainly an option that the Centre can examine. The country will also eagerly wait for the Supreme Court response to the public interest litigation filed by CASC on the need for imposing a financial emergency.