Finance Ministers across a number of Indian states are urging the central government to speed up transfer of resources to counter the fallout of a 40-day nationwide lockdown.
The lockdown began on March 24 and will now continue to May 3, which means that states will earn close to nothing from activities like property registrations, sales of alcohol and petroleum products. With a whole month of no revenues, some states will face pressure on meeting committed expenditures like salaries and pension payouts.
‘Revenue Has Completely Collapsed'
“70 percent of state revenue used to come from value added tax, which has broadly become GST. Now what has happened is that 70 percent has completely collapsed due to lockdown... By and large there is no GST coming into the states,” said Amit Mitra, finance minister of the state of West Bengal in a conversation with BloombergQuint. Other key sources such as stamp duties paid on property transactions, excise duties on liquor sales, and tax revenues on sales of petroleum products have also dried up, he added.
The sentiment was echoed by Thomas Isaac, finance minister of the state of Kerala. Isaac told BloombergQuint that tax revenues have collapsed. Expenditures meantime have surged.
Kerala, for instance, has outlined a Rs 20,000 crore package to provide relief to those impacted by Covid-19. This includes income transfers of about Rs 5,000 each for those whose livelihoods have been impacted and free food rations for those below the poverty line.
The funds coming in do not match the expenditures of the state governments, Isaac said.
“What are the expenditures of the state governments? First is salaries. You are telling private employers not to cut salaries but what if states cut salaries like some have already done. Tomorrow, even I may not have money to pay salaries. How do I pay?” Isaac asked.
Watch the full conversation with Amit Mitra below:
Tax Devolution ‘Dysfunctional'
Compounding problems for states are the staggered and unpredictable transfers from the central government to state governments. A number of factors have played into reduced and staggered transfers from states.
The Union Budget in February, showed that state transfers were down by Rs 1.6 lakh crore in the revised estimate compared to the budget estimates. This meant that states were scheduled to see lower transfers even before the Covid-19 crisis hit.
Over and above that, the GST compensation cess that the centre is to transfer to states has also been delayed. The central government still owes about Rs 30,000-34,000 crore to states as Goods and Services Tax compensation for December 2019 and January 2020, BloombergQuint reported earlier this month.
Finally, as the economy slows, the central government's tax collections for FY21 will fall well below the budgeted estimates.
According to Mitra, states like West Bengal have asked that the revenue deficit grants to be transferred by the centre should be provided upfront. Nothing has happened so far, Mitra said.
The contribution that the centre has to be provide for centrally sponsored schemes is also yet to be fully transferred, he added. Finally, the GST compensation cess for the months of December-March is pending, Mitra said.
Other state finance ministers have also appealed to the centre to speed up payment of dues. Ajit Pawar, finance minister of Maharashtra took to his twitter page on Friday, asking the government to fulfill its commitments.
Maharashtra has gone all out in its fight against Corona and needs Central govt's co-operation on the economic front. Have requested Hon. PM @narendramodi ji in writing to fulfill his commitment & disburse payments to help us win this war.
‘Pushed Into Debt Trap'
For now the only option states have is to step up borrowings. But at a high cost.
At the first bond auction of the financial year, states saw costs surge, with Kerala paying a peak rate of 8.9 percent to raise 15 year funds. The second auction saw a marginal reduction but rates remained elevated.
“We front-loaded our borrowings in the first auction itself and we paid a dear price,” Isaac said.
Since then, the Reserve Bank of India has informally advised the state to hold off on further borrowings for some time and also borrow for shorter tenures. “We have decided to wait for a week or two but we will have to go the markets.”
When you are in a period of negative income growth and you are borrowing at 8-9 percent, that is the surest formula of a debt trap, Isaac said.To provide short term relief to states, the RBI has increased the ‘Ways And Means Advances limit for states by 60 percent. Under this facility states can borrow close to Rs 51,000 crore for 90-days, with a 21-day period of overdraft permitted.
Both Mitra and Isaac said that these borrowings are more in nature of cash management and not adequate to support the long term funding needs of states.
The time has come, they say, for the central government to expand the fiscal deficit materially, and, if needed, ask the Indian central bank to monetise some part of the deficit.
“The central government has to now come out with a package of 6 percent of GDP as stimulus to the economy, from which a lot of things will have to come to the states because health, education, Covid management is under the states. That will get us Rs 10 lakh crore,” Mitra said. “Central government has the capacity, which we don't. They can borrow money from the Reserve Bank, which we can't do.”
Isaac shared that view.
“We have cut rates, cut cash reserve ratio but the system is just not responding. Therefore, we should just borrow from the Reserve Bank and monetise the debt,” Isaac said.
Watch the full conversation with Thomas Isaac below:
Essential Business Intelligence, Continuous LIVE TV, Sharp Market Insights, Practical Personal Finance Advice and Latest Stories — On NDTV Profit.
