Migrants from Maharashtra arrive by a special train at Prayagraj railway station (Representational image) | PTI
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New Delhi: 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 in order to avoid racking up debt.

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. “Forget creating jobs and reviving the economy, we will be subsisting from quarter to quarter.” Punjab is set to lose a third of its expected annual revenues of 880 billion rupees ($11.7 billion), Badal said.

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.


Also read: ‘Why did Modi abandon us?’ – migrant workers hit hard by lockdown are angry

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‘Chicken Feed’

The same month, Modi approved 172 billion rupees in revenue-deficit grants for 14 of India’s 28 states. Another 110.9 billion rupees were advanced under the State Disaster Risk Management Fund to set up quarantine facilities. While Punjab will receive 6.6 billion rupees 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 21 trillion rupees to shore up the economy that’s bracing for its first full-year 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-at-home orders wiped out their jobs and incomes. Provinces have also been allowed higher borrowing limits and enhanced access to short-term cash requirements — also called ways and means advances.

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.


Also read: Narendra Modi is selling a failed Covid lockdown as a success


Falling Revenues

As the epidemic surged across the country, it’s disrupted regional budgets and fueled 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. States’ share in GST is also expected to drop as a slowdown in the economy is likely to hurt tax collections, while their problems are being compounded by the delay in share of taxes from the federal government.

That could almost double the combined budget deficit — the shortfall for the federal government and states — to 12% of gross domestic product, according to Anubhuti Sahay, chief India economist at Standard Chartered Plc in Mumbai.

“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, the southern state that earned global praise for its handling of the virus outbreak, 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 1 trillion rupees, said Isaac who has called for states to receive 60% of the tax collections instead of the current 40%.

Covid Grant

States could lose as much as 1.5 trillion rupees of sales tax share as collections drop, according to M. Govinda Rao, economist and adviser to two Indian state governments. Already, states like Karnataka reported near-zero revenue collection in April and a loss of 106.7 billion rupees in tax revenues.

“The government should come out with a Covid-19 grant to help states tide over,” said Rao. “What they have done so far is only to allow states to borrow more and that too with conditions like the number of economic reforms they introduce. That’s not ‘cooperative federalism’.”

The introduction of GST — which unified India’s diverse regions into a single market — was one of the biggest reforms that Modi pushed through with the help of state governments in his first term in office. Having returned to power with a bigger mandate last year, he’s seen greater conflicts with states, particularly those led by opposition parties who have resisted his Hindu nationalist party’s backing of moves that discriminate against the Muslim minority. The current dispute remains focused on the states’ restricted fiscal ability.

Frontloading Funds

Modi’s government may need to provide for more fiscal stimulus to push the economy, said N.R. Bhanumurthy, vice chancellor of Bengaluru-based Dr. B.R. Ambedkar School of Economics. The “fair demand” by states for higher GST funds to battle Covid-19 and economic constraints needs to be met without delays, he said.

“In the current year, there is no option other than front-loading GST to the states, even if they have to borrow. Otherwise, states will be in a very bad shape.”

With 80% of India’s infections limited to just eight states, financial help may be the crucial decider between virus success and failure.

“Not all things are equal in terms of the transmission of this virus across the country. There are states which have been particularly hit,” said Priya Balasubramaniam, senior public health scientist at the Public Health Foundation of India. “At least these eight states, will need sustained support from the center.”

The federal government can borrow funds at a cheaper rate from the market to help states which have been forced to slash capital expenditure in a year already marred by fiscal deficit constraints, Punjab’s Badal said.

“The first step to tackle a problem is to admit there is one,” he said.- Bloomberg


Also read: India’s richest states will have biggest income losses, SBI says


 

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