States need more funds from Modi govt to ensure vulnerable are protected during Covid: Paper

The Accountability Initiative working paper says state finances were already under pressure before the Covid-19 pandemic struck due to lower tax devolution and GST compensation.

Representational image of Indian rupee | Dhiraj Singh | Bloomberg

New Delhi: State finances are going to worsen in the coming months and the Narendra Modi government will have to support Indian states to ensure that they are able to provide social protection to their residents, a working paper on state finances by the Accountability Initiative said.

“With states at the frontlines to mitigate the short- and long-term impact of Covid-19, and ensure vulnerable communities have adequate means of social protection, it will be imperative for the Union government to ensure that states have adequate resources,” said the paper, which was published this month.

The paper pointed out that states had been under stress even before the pandemic, with falling revenues from the goods and services tax (GST), reduction in the money received from the states from the pool of central taxes and delays in payment of GST compensation. However, the pandemic is only going to worsen the situation of state finances.

“The estimated 12 per cent growth in tax revenue targeted by the Union government for FY 2020-21 BE (budget estimates) as against 4 per cent in FY 2019-20 RE (revised estimates) would look more challenging in the current scenario. Therefore, the actual tax devolution to States for FY 2020-21 BE is expected to be much lower than the estimated Rs 7.8 lakh crore,” the paper said.

Tax devolution funds are untied funds, or those with no conditions, and allow states to spend them according to their needs.

The Accountability Initiative is a research group, which is part of the policy think-tank Centre for Policy Research.

Other highlights

The working paper pointed out that the Modi government’s payment to states as part of the GST compensation is likely to be “incomplete and non-timely” given the recent decline in GST collections that has been further worsened by the Covid-19 outbreak.

It also said that the increase in the ways and means advances by the Reserve Bank of India for states may be inadequate to weather the present crisis.

With committed liabilities forming a large share of expenditure, it will be challenging for states to reallocate resources towards the Covid-19 pandemic without additional revenue mobilisation, pointed out Accountability Initiative.

It also stressed the need for rethinking of social policy financing, advocating a redesign of the centrally-sponsored schemes by allowing greater flexibility to states.