CORONAVIRUS PANDEMIC
India’s soaring coronavirus numbers are threatening its economic recovery and sharpening differences between states and Prime Minister Narendra Modi’s federal government. This week India surpassed Russia to become the third worst-hit country with more than 740,000 Covid-19 infections. The surging virus numbers have all but overwhelmed the public health system, which the states are responsible for. It’s also piling on pressure on local governments at a time when they’re scrambling to restart economic activity.
The country’s sudden lockdown — imposed without consulting state governments — shattered the already troubled economy. All non-essential activity stalled and state tax collections fell sharply, pushing local governments to ask the federal government for funds.
The money crunch is putting everything — from the salaries of government employees to their ability to fight the virus — at risk. “My understanding of the Indian Constitution says that if states are in distress, the government of India should come to their aid,” said Manpreet Singh Badal, finance minister of the northern state of Punjab, which is ruled by the opposition Congress party.
India imposed one of the world’s largest and strictest virus lockdowns from end-March and began easing restrictions starting April 20 even as infections continued to surge.
‘Chicken Feed’
The same month, Modi approved Rs172 billion in revenuedeficit grants for 14 of India’s 28 states. Another Rs110.9 billion were advanced under the State Disaster Risk Management Fund to set up quarantine facilities. While Punjab will receive Rs6.6 billion of the disaster relief fund, the amounts are “chicken feed” compared to the magnitude of the states’ needs, Badal said.
In May, almost two months into the lockdown, Finance Minister Nirmala Sitharaman announced measures worth Rs21 trillion to shore up the economy that’s bracing for its first fullyear contraction in more than four decades. That included help to states to fund food and shelter for hundreds of thousands of migrant workers forced to head to their villages after the stay-athome orders wiped out their jobs and incomes.
When asked about states’ demands, a spokesman for the federal finance ministry referred to a speech by Sitharaman on June 12. “In July, on the request of all ministers, there shall be a meeting to discuss exclusively one agenda point, and that is compensation cess which has to be given to the states,” she had said at the June meeting of a panel on the goods and services tax, proceeds of which the Modi government shares with the provinces. The compensation was a reference to a payment made to regional governments in lieu of their giving up the bulk of their tax-making powers to the federal administration in 2017.
Falling Revenues
As the epidemic surged across the country, it’s disrupted regional budgets and fuelled tensions between federal and state governments over tax collections. With ability to only tax property, alcohol and fuel sales, states’ revenues plunged during the lockdown, constraining their ability to pay salaries and service debt.
“The impact of the pandemic on the revenue receipts of the central and state governments has been devastating,” T.M. Thomas Isaac, finance minister of Kerala wrote on June 16.
GST dues worth $4.9 billion for the three months ended February were paid to states after a delay of four months on June 4. Arrears to states remain at more than Rs1 trillion, said Isaac who has called for states to receive 60 per cent of the tax collections instead of the current 40 per cent.