In­dian states are short of money. They need help

Changes of the past six years had put their fi­nances in a pre­car­i­ous po­si­tion. The cur­rent mea­sures aren’t enough

Hindustan Times (Jalandhar) - - COMMENT - AVANI APUR DIT JAN Avani Ka­pur is fel­low, Cen­tre for Pol­icy Re­search, and di­rec­tor, Ac­count­abil­ity Ini­tia­tive (AI). Udit Ran­jan is se­nior re­search as­so­ciate, AI. (This piece is based on a work­ing pa­per by AI, and co-au­thored with Vas­tav Irava and Sharad P

The an­nounce­ment by Prime Min­is­ter Naren­dra Modi of the ~20-lakh crore At­manirb­har Bharat Ab­hiyan (Self-re­liant In­dia Cam­paign) pack­age left many scram­bling with the fis­cal maths — where would the re­sources come from and how would they be struc­tured? Over the past five days, de­tails have emerged; these in­clude in­creas­ing the Ma­hatma Gandhi Na­tional Ru­ral Em­ploy­ment Guar­an­tee Scheme (MGNREGS) al­lo­ca­tions, eas­ing con­cerns of mi­cro, small and medium en­ter­prises, end­ing coal mo­nop­oly, and en­sur­ing farm­ers credit. The last tranche also fo­cussed on a much-needed as­pect — ad­dress­ing the fis­cal health of states.

We an­a­lysed the rev­enue and ex­pen­di­tures of 17 states to as­cer­tain the sta­tus of their fi­nances prior to the out­break of the coronaviru­s disease (Covid-19) and as­sess their ca­pac­ity to deal with the cri­sis. Our find­ings sug­gest that re­cent changes in In­dia’s fis­cal ar­chi­tec­ture — in­clud­ing the Goods and Ser­vices Tax (GST) regime, and in­crease in state shares for the Cen­trally Spon­sored Schemes (CSSs) — had placed state fi­nances in a pre­car­i­ous po­si­tion, even prior to the cri­sis.

The de­pen­dency of states on the Cen­tre for rev­enues has in­creased, with the share of the rev­enue from own sources de­clin­ing from 55% in 2014-15 to 50.5% in 2020-21. While part of this is in­her­ent in In­dia’s fis­cal struc­ture, wherein states are the big spenders and the Cen­tre con­trols the purse strings, the sit­u­a­tion has been ex­ac­er­bated by the in­tro­duc­tion of the GST. Bar­ring a few ex­cep­tions, such as pe­tro­leum prod­ucts, prop­erty tax, and al­co­hol ex­cise, in­di­rect taxes have, to a large de­gree, been sub­sumed un­der the GST regime, erod­ing the abil­ity of states to raise their own rev­enues.

Typ­i­cally, some of this im­bal­ance is cor­rected through a re­lease of tax de­vo­lu­tion to states. More­over, to off­set the loss in rev­enue due to the changed tax­a­tion sys­tem, the GST regime in­cludes a pro­vi­sion wherein if tax col­lec­tion falls be­low a growth rate of 14% for state GST, the Cen­tre dis­burses a GST com­pen­sa­tion.

Our anal­y­sis, how­ever, finds that ac­tual taxes de­volved to states have re­mained con­sis­tently lower than those pro­jected by the 14th Fi­nance Com­mis­sion (FC) — a short­fall of around ₹6.84 lakh crore be­tween 20152020. This has been driven by an in­crease in the share of gross rev­enues com­ing from cesses and sur­charges im­posed by the Cen­tre — which aren’t shared with states — from 2.3% in the early 1980s to as high as 15% in the re­cent pe­riod as per the Re­serve Bank of In­dia, and a short­fall in ac­tual tax col­lec­tion. While the Cen­tre re­leased ~46,038 crore in April as per the orig­i­nal bud­get, sub­se­quent in­stal­ments will tell us whether the trend of short­falls will con­tinue.

Adding to state woes is the sig­nif­i­cant di­ver­gence in past pe­ri­ods be­tween the amount of GST com­pen­sa­tion owed and the ac­tual pay­ments made, in­clud­ing for states such as Ut­tar Pradesh, Bi­har and Jhark­hand that need greater fis­cal sup­port. Even be­fore Covid-19 hit, 11 states es­ti­mated a rev­enue growth rate be­low the es­ti­mated 14% level, im­ply­ing higher amounts will be owed as GST com­pen­sa­tion. With the bulk of the states’ GST com­ing from goods such as elec­tron­ics, fash­ion, and en­ter­tain­ment — all of which have been im­pacted by the pan­demic — these rev­enues are likely to de­cline fur­ther.

The sec­ond ma­jor source for rev­enues from the Cen­tre is CSSs that are aimed at en­sur­ing a min­i­mum stan­dard of pub­lic ser­vice pro­vi­sion across the coun­try. Though the over­all fund­ing through CSSs has de­clined for many states fol­low­ing the 14th FC rec­om­men­da­tions, they still con­sti­tute a sig­nif­i­cant por­tion of rev­enue.

How­ever, CSSs tend to be un­pre­dictable, with re­leases de­ter­mined on meet­ing cer­tain con­di­tion­al­i­ties. In 2019-20, the to­tal short­fall be­tween es­ti­mated bud­gets and re­vised es­ti­mates was ~14,794 crore. One such con­di­tion­al­ity is the re­quire­ment of states to put a por­tion of their own funds for CSSs. In Oc­to­ber 2015, this share in­creased from 15%-25% to as high as 50% for sev­eral schemes, curb­ing the fis­cal flex­i­bil­ity of states by ring-fenc­ing rev­enues back into CSSs. The re­cent cir­cu­lar by the Cen­tre, clar­i­fy­ing that it would not cut CSS funds, but will also not de­crease the State share, will be of lit­tle com­fort to states at a time when the great­est need is one of flex­i­bil­ity to meet lo­cal needs.

Ex­pen­di­ture anal­y­sis shows that in 2020-21, states ex­pected only around 75% of their to­tal ex­pen­di­ture to be met through rev­enue re­ceipts, with the rest com­ing from other sources such as ex­ter­nal bor­row­ings. This is even af­ter many states had an­tic­i­pated lower ex­pen­di­ture for health and the so­cial sec­tor.

While ex­pen­di­tures are likely to rise in re­sponse to the pan­demic, with over onethird of fund­ing al­ready com­mit­ted to salaries, pen­sions and in­ter­est pay­ments, find­ing ad­di­tional re­sources will be hard. The in­crease by 60% in the lim­its for short-term bor­row­ings are un­likely to meet the high, longer-term bor­row­ing re­quire­ments. Sun­day’s an­nounce­ment of in­creas­ing states’ bor­row­ing lim­its from 3% of GSDP to 5%, re­sult­ing in an ad­di­tional ~4.28 lakh crore also comes with re­form con­di­tion­al­i­ties and only 0.5% — or ~2140 crore — as un­tied, which states can spend as per needs.

There is no ques­tion that the pan­demic and the lock­down have brought var­i­ous as­pects of so­cioe­co­nomic life to a stand­still. The slow­down of pro­duc­tion and con­sump­tion is ex­pected to gen­er­ate medium- and longer-term reper­cus­sions on the econ­omy, in terms of its rev­enue-rais­ing abil­i­ties as well as ex­pen­di­tures. The abil­ity of the State to re­spond ef­fec­tively will be de­ter­mined by how quickly it can move away from a busi­ness-as-usual model to what some have re­ferred to as a war-time econ­omy. It re­mains to be seen if the mea­sures ex­tended by the Cen­tre and RBI will be ad­e­quate for states to tide over the cri­sis.

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