NIGHTMARE REVISITED
The financial impact on states of the ongoing lockdowns
The aggregate fiscal deficit of states in FY21 was 4.4 per cent of GDP while the country’s fiscal deficit was pegged at 9.5 per cent of GDP. The deficit has widened as the Centre has had to raise debt from external sources to fund the states’ revenue shortfalls and GST (Goods and Services Tax) losses. As per GST norms, the Union government is supposed to make up for the states’ shortfall in GST collections.
The outlook is grim. “If the shutdowns continue for three weeks, as is expected, there will be an impact on economic revival over the next two quarters. This includes GST revenues and collections such as excise and VAT (value-added tax) for states,” says Pinaki Chakraborty, director, National Institute of Public Finance and Policy (NIPFP), New Delhi.
The current and looming financial crunch will mean forced cutbacks in capital expenditure by states—on roads, bridges, highways etc.—a cumulative estimate of which for this fiscal was 10-15 per cent of their budget expenditure. The cutbacks will inevitably have a cascading effect on demand for cement and iron ore. Demand for fuel and liquor has already taken a hit, and the VAT levied on these items comprise roughly a third of state revenues.
The curfews, lockdowns and voluntary shutdowns of factories have already triggered a fresh exodus of migrant workers from the big industrial centres. Commercial centres in Mumbai, Delhi, Hyderabad, Chennai and Bengaluru are either shut or working at less than half their capacity. On April 20, Hero MotoCorp halted operations at all its manufacturing facilities till May 1. This was followed by several automobile and other manufacturers in Gurugram, Haridwar, Vadodara, Ludhiana, Sonepat, Manesar and Faridabad temporarily suspending production.
The drop in production and discretionary demand is bound to impact GST collections. Gross GST revenue collected in March 2021 had touched a record Rs 1.23 lakh crore. It was the fifth straight month in the last fiscal when GST collections crossed Rs 1 lakh crore a month. This momentum needs to be maintained in order to put states’ planned capital expenditure back on track. Gopal Krishna Agarwal, the BJP national spokesperson on economic affairs, holds out hope. “Unlike last year, we know the disease better now and are well-equipped. There are challenges related to healthcare infrastructure and supplies, but both the Centre and the states are determined to resolve them at the earliest. The surge in Covid cases has not had much impact in 350 districts. There is no point in damaging the economy in these districts,” he says.
The vaccination drive will be a major expense head for state governments. The Centre has now allowed manufacturers to supply 50 per cent of the ordered doses to states and private players in the open market. Back of the envelope calculations indicate that, at current prices, states will need at least Rs 40,000 crore to fund the drive. Maharashtra, Uttar Pradesh and Assam have announced they will vaccinate people free of cost.
Financial institutions have estimated India’s GDP growth in FY22 in the range of 7.7–13.7 per cent, not considering the effect of the current lockdowns. The months ahead will be a roller coaster. ■
COVID VACCINATION WILL BE A MAJOR EXPENSE HEAD FOR STATES. ROUGH ESTIMATES INDICATE STATES WILL NEED AT LEAST Rs 40,000 CRORE TO FUND THE DRIVE