State of Public Finance in India during COVID-19

The novel coronavirus pandemic has cast a long shadow of financial uncertainty for both the Centre and states. The impact of the pandemic on the economy and the lives of the economically and socially disadvantaged requires a sizeable government funding exercise to try and limit the ripple effects of the pandemic. Livelihoods need to be supported, funding requirements closed, and the economy be given a financial helpline. Thus, the act of financing said requirements, given finite resources, is of the utmost importance. This, however, is extremely challenging given the tools at the disposal of the authorities tasked with mitigating the deleterious effects of COVID-19 – the state governments.

A glance at the macroeconomic indicators

To begin with, finances at the Centre are under severe duress, and this was the case even before the COVID-19 pandemic struck. As per Nirmala Sitharaman’s budget speech in February of this year, national economic growth for the financial year (FY) 2020-21 was forecasted to grow at a nominal rate of 10%.1 Even though growth figures for the entire FY of 2019-20 are yet to be released, the dismal reading of growth registered in the year’s third quarter, that of a seven year low 4.7%, does not spell good reading for the entire year, let alone a financial year-end ravaged by a pandemic.2 Add to that over-optimistic tax collection forecasts, with a 33% increase in both direct and indirect tax mop up required in the current FY in order to meet budgeted tax revenue predictions, off the back of grossly overestimated forecasts laid out in the revised edition of last year’s budget.3 With direct tax collection contracting 5.4%, despite net receipts rising due to a substantial fall in the refunds paid out, in the first month of this FY, actual tax collection for the entire year does not appear to be ending up anywhere close to the forecasts.4 If anything, the announcements made by the FM regarding Atmanirbhar Bharat Abhiyan demonstrates the extremely precarious fiscal position of the Centre given the relatively small amounts of fiscal outlay it would require compared to the overall quantum of the economic stimulus measure which is Rs. 20 lakh crore.

The Centre’s largest sources of revenue are corporation tax, income tax, the Goods and Services Tax (GST) and gross market loans, as per the last two budgets.5, 6 The next biggest contributors to the Centre’s coffers, non-tax revenue and excise duties, is half of any one of these four. With the government reducing effective corporation tax rates to 25.17% from 35%, and with GST and income tax gross collections put under severe pressure from the drastic fall in economic activity as a result of the lockdown, revenues collected by the Centre are sure to take a considerable hit.7 Therefore, the only avenue that can propel greater government expenditure towards efforts to revive the economy is gross market borrowings. Fiscal Responsibility and Budget Management (FRBM) fiscal deficit limitations, even beyond the current invoking of the exception clause that mandates a 3.8% adherence level for the current FY, would have to be further relaxed by the Finance Commission as a result. India’s sovereign external debt to GDP ratio is one of the lowest of the world at 5%. 8 Although the country’s fiscal deficit, when taking into consideration all levels of government, is 7.5% as per the International Monetary Fund (IMF), an emerging market high, and reservations abound with regards to external sources of debt, authorities might be left with no choice but to keep aside fiscal prudence for the time being in order to construct an able economic recovery. 9

Coming to the states and their finances, as per a Reserve Bank of India(RBI) report on the status of state finances, nearly half (45%) of states’ revenues come from their own taxes while 47.5% arrive via the Centre and its transfers. 10 Out of the revenue collected by the state through its own taxes, 90% comes from just four avenues – taxes collected through the sale of liquor, petroleum products, stamp duty and registration of vehicles. With automobile heavyweights such as Maruti Suzuki and Hyundai announcing no domestic vehicle sales in the month of April, flights and cars parked idle, and property registrations taking a hit due to falling real estate sales, it is no wonder states welcomed news of liquor shops being allowed to function during the latest variant of the lockdown that began on May 4. According to the State Bank of India’s  Ecowrap research publication, combined fiscal deficit of 19 states could rise to 3.5% of GDP in FY2021 from the budgeted 2.04%. 11 Further, a collection of states has called for easing of FRBM fiscal deficit and borrowing limits, besides a frontloading of this market-led borrowing. 12 With allocations under the State Disaster Risk Management Fund being called into question, GST dues to the tune of 40,000 crore yet to be received, revenue deficit grants, as recommended by the 15th Finance Commission, falling short by another 44,000 crore and the suspension of Members of Parliament Local Area Development Scheme, states are extremely restricted when it comes to their potential financing options. 13

The COVID-19 relief package

Union finance minister announced a COVID-19 relief package on March 26 that incorporated cash transfers to senior citizens, women, widows, differently abled, and farmers, the distribution and disbursement of ration, gas cylinders, loans to self-help groups and higher Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) wages, as also PF withdrawals. 14 Till April 14, the government had released just under 50% of the promised cash amount as also the food grains and cooking gas cylinders, as per a statement put out by the ministry of finance. 15 However, with stories of migrant workers trudging along highways on their way home, many not able to make it, home shelters in dilapidated conditions, food not making its way to these persons, as attested to by surveys, disinfectants being sprayed on them by police and the Aurangabad train incident, amongst other atrocities, the relief package and responses to countering the spread of the COVID-19 virus does not do enough for those most socio-economically disadvantaged. 16 Further, with the country’s relief package, including the recently announced Atmanirbhar Bharat Abhiyan, at 10% of GDP, compared to Malaysia (16.2%), Singapore (12.2%), Japan (20%), and the UK (17% as on April 13), there have been vociferous calls for a sizeable increase in the country’s subsequent relief packages, should they arrive. 17, 18 The economic aid must also be utilised to prop up demand and income, instead of the liquidity relief that has been announced by Nirmala Sitharaman over past week. With systemic changes such as the amendment to the Essential Commodities Act and agricultural marketing reforms potentially being met with bureaucratic red-tapism, and with no additional income support to be given, coupled with the absenteeism of those most marginalized from the formal credit system, India’s economic stimulus does not provide immediate relief to those most affected by the country’s stringent lockdown.

What about the unutilised funds?

In the build-up to announcing the March relief package, the Union finance minister had also announced that states should utilise District Mineral Foundation (DMF) funds and cess funds created for the welfare of construction workers for COVID-19 response preparedness and welfare service delivery for that category of workers, respectively. With the utilisation pattern of the construction workers’ cess funds highlighting not only dormant usage but also excessive capacity, pressure needs to be applied on states to use these resources for the betterment of their citizens. 19 DMF are non-profit trusts set up by the Mines and Minerals (Development and Regulation) Amendment Act, 2015. They were established with the objective to work for the benefit and interest of people and areas affected by mining-related operations. Besides there being doubts about the utilisation of these funds, problems of oversight and monitoring of the funds earmarked for welfare purposes persist. 20 Further, there are doubts about utilising resources that cater to at-risk populations, like the indigenous tribal groups, for dealing with an emergency crisis. It might set similar precedents for future events wherein resources that have been targeted at specific populations get exhausted even before other means are explored.

A similar question can be raised against the suspension of the Member of Parliament Local Area Development Scheme and its funds being repatriated to the Consolidated Fund of India under the Centre. This, even as the main relief fund set up by PM Modi, the Prime Minister Citizen Assistance and Relief in Emergency Situations (PM CARES), continues to collect donations such as the railways’ recent rupees 151 crore pledge while lacking on transparency and accountability.21 The fund could also divert resources away from other non-profits and localised solutions since donating to it is recognised as CSR contributions, besides it completely sidestepping the existence of the Prime Minister’s National Relief Fund that has been in existence since 1948 for the very same national disaster management purposes. 22

RBI’s measures

The RBI has, so far, announced additional liquidity measures such as lowering of the cash reserve and liquidity coverage ratio, policy repo and reverse repo rate, targetted long-term lending directed at priority sector funding houses such as mid- to low-tier non-banking finance companies, Small Industries Development Bank of India, National Bank for Agriculture and Rural Development and National Housing Bank, and money injection exercises like the provision of 1- to 3-year bonds. 23 However, doubts remain as to the risk coverage and high credit spreads of these instruments. Without the government taking over risk management for financial institutions, like the federal government in the US providing credit guarantees to lenders, targetted long-term lending instruments such as targetted long-term repo operations of the RBI’s will continue being under-subscribed, even with the regulatory forbearance in asset classification the central bank has announced. 24

With transmission of lower interest rates to lenders and the uptick in demand for these loans issues, the Central government might just have to borrow more, as described above. Although its external sovereign debt is relatively low as a percentage to GDP, risk aversion and capital outflow from emerging economies in emergency situations put such debt at increased risk. The nation’s foreign exchange reserve kitty of $476 billion can also be put to the test but an already sizeable current account deficit and high public debt financing issues, in light of the expected widening of the fiscal deficit, restricts the extent to which it can be harnessed. 25 Finally, there have been calls to monetise the fiscal deficit through the printing of fiat currency by the RBI. Even though inflation risks persist, March’s inflation numbers were the lowest in four months. 26 Plus, with the economy requiring a massive, but temporary, sustenance boost, even if inflation were to get pushed up in the near-term, it should fall back within the central bank’s preferred 2-6% range in the medium- to long-term. Emergency situations call for new inflationary frameworks. All eyes will be on RBI’s annual household inflation expectation survey to be released this month.

Budget rationalisation

Lastly, another potential source of financing could be the redrawing of the budget. Measures are already in place to bracket all COVID-19 related expenditure in a separate bucket in order to prevent budget constraints coming in the way of necessary revival-focused expenditure. 27 A shift in current allocations of budgets and the revenue and grant structure of states could also be implemented. At present, for example, the ministry of health has been accorded a paltry sum of 41% of the ministry of home affair’s FY2021 rupees 1.67 lakh crore budget. 28 Also, further non-essential and wasteful expenditure such as that carried out on the central vista redevelopment project (rupees 20,000 crore), and non-merit subsidies like food, fertiliser and petroleum, besides the examples mentioned previously, seemingly make room for significant financial priority reallocations. States, too, spend a great majority of their pools of financial resources on non-merit subsidies and goods. Some of them spend as much as 80% of their health budgets on salaries. 29 It has also been estimated that a rationalisation of non-merit subsidies of states can lead to the freeing up of fiscal space equivalent to 6% of GDP. 30 However, even the outlay on merit subsidies or public goods by states is hamstrung by the current fiscal architecture. The primary source of money for said expenditure is through central transfers to states through centrally sponsored schemes and central sector schemes. 31 This arrangement hampers and restricts not only the financial autonomy of states but also decision-making independence as central schemes (such as Integrated Child Development Scheme and National Health Mission) are the main modes through which state public good expenditure is done. The line ministries responsible for each of these schemes are too many and coordination amongst them is tempered by bureaucracy and red tape.

Conclusion

Wasteful and unnecessary expenditure needs to be tapered. States require a significant overhaul of their fiscal framework. The Centre needs to obey their end of the federal bargain. Fiscal and monetary policies seem to be too risky but emergency situations call for relaxation of otherwise prudential constraints. Without these measures in place, it is no wonder states like Maharashtra and Delhi have resorted to severe budget cuts, halting of any new project, and hikes in excise duties on petrol and diesel as also taxes on liquor, respectively.32, 33 In order to respond adequately to the next crisis therefore, fungible, flexible, autonomous and sustainable financing is of the utmost significance.

REFERENCES


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[4] Seth, Dilasha. 2020. “Refunds Save the Day for April Direct Tax Collection; Mop-up down 5%.” Business Standard. Business-Standard. May 2, 2020. Accessed May 4, 2020. https://www.business-standard.com/article/economy-policy/refunds-save-the-day-for-april-direct-tax-collection-mop-up-down-5-120050300014_1.html.

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[12] Bureau, Our. 2020. “States Petition Centre for Economic Lifejacket.” @Businessline. The Hindu BusinessLine. May 1, 2020. Accessed May 4, 2020. https://www.thehindubusinessline.com/economy/policy/states-petition-centre-for-economic-lifejacket/article31484147.ece.

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[14] Ohri, Nikunj. 2020. “What India Has Released From Its Rs 1.7 Lakh Crore Relief Package For The Poor .” BloombergQuint. Bloomberg Quint. April 14, 2020. Accessed May 5, 2020. https://www.bloombergquint.com/coronavirus-outbreak/what-india-has-released-from-its-rs-17-lakh-crore-relief-package-for-the-poor.

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[19] “Centre for Policy Research.” 2020. Analysis: How Secure Are Construction Workers in India During COVID-19 Pandemic? | Centre for Policy Research. April 1, 2020. Accessed May 5, 2020. https://www.cprindia.org/news/8724.

[20] Pti. 2018. “Need a Monitoring Mechanism to Ensure Prompt Use of Funds under DMF: Parliamentary Panel to Mines Ministry.” The Economic Times. Economic Times. December 30, 2018. Accessed May 5, 2020. https://economictimes.indiatimes.com/industry/indl-goods/svs/metals-mining/need-a-monitoring-mechanism-to-ensure-prompt-use-of-funds-under-dmf-parliamentary-panel-to-mines-ministry/articleshow/67308833.cms?from=mdr.

[21] “Covid-19 Update: Row over Migrants’ Rail Fare as Congress Offers to Foot the Bill.” 2020. Hindustan Times. May 4, 2020. Accessed May 5, 2020. https://www.hindustantimes.com/india-news/row-over-migrants-rail-fare-as-cong-offers-to-foot-the-bill/story-XrPFuQeVL9Mu3irfpbAQgM.html.

[22] http://www.ETHealthworld.com. 2020. “Donations Pour in but India’s ‘PM CARES’ Coronavirus Fund Faces Criticism – ET HealthWorld.” ETHealthworld.com. April 8, 2020. Accessed May 5, 2020. https://health.economictimes.indiatimes.com/news/industry/donations-pour-in-but-indias-pm-cares-coronavirus-fund-faces-criticism/75047270.

[23] Bloomberg. 2020. “The Steps India Has Taken so Far to Contain Economic Fallout of Covid-19.” The Economic Times. Economic Times. April 22, 2020. Accessed May 5, 2020. https://economictimes.indiatimes.com/news/economy/policy/the-steps-india-has-taken-so-far-to-contain-economic-fallout-of-covid-19/articleshow/75285944.cms?from=mdr.

[24] Rajan, Ramkishen S., and Sasidaran Gopalan. 2020. “COVID-19 and India’s Fiscal Conundrum.” The Hindu. The Hindu. May 5, 2020. Accessed May 5, 2020. https://www.thehindu.com/opinion/op-ed/covid-19-and-indias-fiscal-conundrum/article31504085.ece.

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[26] Mishra, Asit Ranjan. 2020. “Retail Inflation Eases to 4-Month Low in Mar on Lower Food Prices.” Livemint. April 13, 2020. Accessed on May 5, 2020. https://www.livemint.com/news/india/retail-inflation-eases-to-below-6-in-march-11586779208538.html.

[27] Sikarwar, Deepshikha. 2020. “Talks Held on Separate Covid Budget.” The Economic Times. Economic Times. April 18, 2020. Accessed on May 5, 2020. https://economictimes.indiatimes.com/news/economy/finance/talks-held-on-separate-covid-budget/articleshow/75209728.cms?from=mdr.

[28] Kannan, KP. 2020. “No Excuse for a Niggardly Covid-19 Relief Package.” @Businessline. The Hindu BusinessLine. April 13, 2020. Accessed on May 5, 2020. https://www.thehindubusinessline.com/opinion/india-needs-a-better-covid-19-relief-package/article31297141.ece#.

[29] Yadav, Jyoti, Fatima Khan, and Policy Research. 2020. “Covid Fight Will Leave States Exhausted. India Needs to Re-Think Its Funds Transfer System.” ThePrint. May 4, 2020. Accessed on May 5, 2020. https://theprint.in/opinion/covid-fight-will-leave-states-exhausted-india-needs-to-re-think-its-funds-transfer-system/414036/.

[30] NIPFP. Accessed May 5, 2020. https://www.nipfp.org.in/media/medialibrary/2019/11/WP_282_2019.pdf.

[31] Yadav, Jyoti, Fatima Khan, and Policy Research. 2020. “Covid Fight Will Leave States Exhausted. India Needs to Re-Think Its Funds Transfer System.” ThePrint. May 4, 2020. Accessed on May 5, 2020. https://theprint.in/opinion/covid-fight-will-leave-states-exhausted-india-needs-to-re-think-its-funds-transfer-system/414036/.

[32] Amey Tirodkar. 2020. “COVID-19 Lockdown: Maharashtra Govt Announces Budget Cuts, No to New Projects and Recruitment.” NewsClick. May 5, 2020. Accessed on May 5, 2020. https://www.newsclick.in/COVID-19-lockdown-maharashtra-govt-announces-budget-cuts-no-new-projects-recruitment.

[33] Sharma, Sharad, and Debanish Achom. 2020. “Delhi To Charge 70% ‘Corona Fee’ On Liquor From Today.” NDTV.com. May 4, 2020. Accessed on May 5, 2020. https://www.ndtv.com/india-news/delhi-to-charge-extra-70-tax-on-liquor-from-tomorrow-amid-coronavirus-crisis-2223273.

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