Adequate financing options key to how states respond to COVID-19: Work paper

State finances were under stress even prior to the COVID-19 crisis and the pandemic has resulted in a further hit to their revenue earnings, a worrying aspect as they need to top up their health and social welfare spending amid COVID-19 crisis, according to a working paper.

The working paper on state finances by the research group Accountability Initiative further said that this is worrying as states are required to significantly hike health and social security expenditure of "vulnerable" sections.

"The finances of states were under stress. A variety of factors are responsible, including structural changes to the fiscal architecture that determines transfer of funds from the Union to states," it said.

The COVID-19 pandemic has resulted in a further slowdown of revenue earnings, the paper said.

It added that in the coming months, states will deepen their pandemic response.

"Adequate financing options that meet their needs will be key to how they respond, and the impact this will have on their ability to safeguard India's most vulnerable citizens," it said.

Noting that the taxes are an important source of revenues for states,the paper said yet, their proportion in total revenue receipts of states fell from nearly 30 per cent in 2018-19 to 24 per cent in Revised Estimates of 2019-20.

Meanwhile, it said the primary activities through which states can raise revenues (indirect taxes) are severely hit by the COVID-19 pandemic.

"States have been responding through measures such as levying additional taxes on alcohol, additional borrowings, salary cuts and reduction in non-essential capital expenditure," the paper noted.

Through an analysis of 17 state budgets, the paper said the rigid, uniform norms and strict centralised guidelines for implementation of Centrally Sponsored Schemes could constrain their flexibility to spend as per needs.