In dire straits

Financing needs of states must be addressed urgently

The extension of the lockdown and the continued rise in the number of Covid-19 cases suggest that the Indian state and the economy are headed for real tough times. The difficulties can rise manifold, given the fact that state governments, which have been at the front line of the battle against Covid-19, have run out of resources, only partly because Central fiscal transfers have been delayed. The Reserve Bank of India has increased the limit for ways and means advances, but it will not be enough. As more information seeps out, the picture can be seen to be dire, with almost all state governments apparently collecting lower revenues than their salary bill. Delhi and Rajasthan have reported a 90 per cent and 70 per cent drop in revenues in April, respectively, compared with the year-ago period. The lockdown is directly responsible for the collapse in state government revenues, evident from no movement of vehicles, leading to a loss of revenue from petroleum products and the 40-day closure of liquor shops. The absence of vehicle and property purchases has affected registration fees and stamp duties. Along with goods and services tax, these account for the bulk of the state government revenues. 

Although liquor shops have been opened selectively and restrictions on movement of vehicles have been eased in the third phase of the lockdown, the Covid-19-related uncertainty indicates that revenues would remain under pressure in the coming months. States would find it increasingly difficult to make even committed expenditure. In the case of Delhi, for example, 74 per cent of the budgeted expenditure in the current fiscal year is revenue expenditure, which will not be easy to cut. Meanwhile, Maharashtra has reportedly decided to freeze developmental expenditure and Punjab is considering deferring capital expenses. The story is not very different in other states. While some states like Delhi and Andhra Pradesh have increased tax on liquor and fuel, it is unlikely to take them too far.

To be sure, the Centre has its own share of problems on the revenue side, and may find it hard to help the states. Indeed, the Finance Commission seems to be inclined to reduce the states’ share of central tax revenue. In the given context, this would be precisely the wrong thing to do, because there is a possibility of a collapse of government for want of money to spend on even the basics. Such a situation must be avoided at all costs.

Therefore, it is necessary to address the fiscal challenge, both at the Central and state levels immediately. Given the revenue situation and increasing expenditure needs, it is clear that governments — both the Centre as well as the states — will not be able to meet their fiscal targets in the current year. Since India is at a critical stage in its fight against Covid-19, and some states would now also have to take care of returning migrants, it’s vital to address the financing challenge. Lack of funds at the state level can weaken their response to the virus, which would worsen the situation in the coming weeks. Policymakers may need to consider a variety of options, including higher limits for ways and means advances, and borrowing from the market or possibly from the central bank directly. These decisions are not easy, but indecision is no longer an option.