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States want Modi govt to release grants and GST dues, raise borrowing limits to fight crisis

A sharp increase in health and social welfare expenditures to battle Covid-19 and protect the poor and vulnerable has adversely affected state finances.

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New Delhi/Bengaluru/Kolkata/Mumbai: Facing higher expenditure and falling revenues as they battle the Covid-19 pandemic, many Indian states have sought a relaxation in their borrowing limits, and timely release of compensation dues relating to the goods and services tax (GST).

During a video conference with Prime Minister Narendra Modi Thursday, states such as Kerala, Rajasthan, Bihar and Tamil Nadu sought a greater leeway from the Centre to help their strained finances, including an increase in the cap of fiscal deficit as percentage of gross state domestic product (GSDP) from the existing 3 per cent as mandated by the Fiscal Responsibility and Budget Management (FRBM) Act.

Rajasthan Chief Minister Ashok Gehlot suggested to the PM that the Union government should grant Rs 1 lakh crore to states to tackle the pandemic, which could be distributed among the states on the basis of number of patients, population or GST Council guidelines.

“I suggested that the borrowing limit of states should be increased by 2 percent so that people feel comfortable. The states also expect a moratorium on the payment of their dues to the financial institutions under RBI, these should be deferred. #CoronaPandemic,” he added.

Bihar Chief Minister Nitish Kumar also sought an increase in the fiscal deficit limit fixed under the FRBM Act to at least 4 per cent or higher, said a state government official, who didn’t wish to be identified.

At a press conference, Kerala Chief Minister Pinarayi Vijayan said the state has sought an increase in the fiscal deficit cap to 5 per cent of the GSDP.

Even Tamil Nadu sought a relaxation in the fiscal deficit limits for 2019-20 and 2020-21, and a 33 per cent increase in borrowings in 2020-21 over the levels allowed in 2019-20 to finance the additional expenditure incurred on battling Covid-19.

The state also asked that the grants due to states for 2020-21, as suggested by the Fifteenth Finance Commission, may be released in advance to help in the cash flow of the states. Specifically, it asked for 50 per cent of the grants to urban and rural local bodies and 50 per cent of the revenue deficit grants to be released in advance. The state also sought doubling of the state limit for borrowing under ways and means from the Reserve Bank of India, and to make it interest-free.

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Some had approached Modi govt earlier too

Separately, some states had approached the Modi government for financial compensation prior to the Thursday meeting.

Among them was Punjab Chief Minister Amarinder Singh, who wrote to the PM seeking the release of GST compensation of Rs 6,752 crore.

Under the GST law, the central government had assured states that they would be compensated for any revenue losses arising from the implementation of GST. This compensation was to be paid out of GST compensation cess fund. The amount in the fund is collected through levy of a cess on so-called sin goods. However, cess collections in 2019-20 have been insufficient to meet the compensation payment requirements leading to delays.

West Bengal Chief Minister Mamata Banerjee also wrote to Modi Wednesday seeking a relief package of Rs 25,000 crore and urging the Centre to clear dues of around Rs 36,000 crore.

Banerjee said the current economic situation and the outbreak were taking a toll on the state’s finances, pointing that Bengal is in the midst of a “debt trap” as even debt servicing is becoming difficult. She also voiced her concern over the reduction in devolution amount to the state — or the state’s share in central taxes — by nearly Rs 11,000 crore.

“State finances (of West Bengal), like that of other states, is in a dire situation with practically no revenue flows after the closure of almost all businesses… and even with the massive debt trap left behind by the previous government, we were able to service the debt so far, but the future remains uncertain,” she wrote.

West Bengal, a debt-ridden state, has an annual interest payment to the tune of Rs 50,000 crore. Banerjee has made repeated requests for a moratorium claiming that the debts were raised during the Left Front’s rule.

Maharashtra Deputy Chief Minister Ajit Pawar has also sought financial assistance of Rs 25,000 crore from the Centre. In a letter to Union Finance Minister Nirmala Sitharaman, Pawar has sought the aid to tide through the Covid-19 fight and the ensuing financial strain.

He has also written to Union ministers Nitin Gadkari and Prakash Javdekar, both from Maharashtra, apprising them of the financial aid sought by the state government.

Of the Rs 25,000 crore, Pawar sought Rs 16,654 crore as dues the Centre owes Maharashtra under various heads, including subsidy and financial assistance. The Centre also has to pay Maharashtra Rs 1,687 crore as the state’s share in various taxes.

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Soumya Kanti Ghosh, group chief economic advisor at State Bank of India, said in a report that state finances look fragile. He highlighted the need for the Modi government to compensate states as part of the larger Covid-19 package.

Analysing 19 Indian states in the report released on 31 March, Ghosh said the states’ fiscal deficit is likely to cross 3 per cent as higher expenditures in social sectors like health and sanitation along with falling tax revenues put a pressure on finances.

“The fiscal deficit projection for FY21 at 2.04% for these states is unachievable as states grapple with the slowdown due to the COVID-19, all the while stepping up spending.”

In most of the Indian states, he pointed out, the budgeted health expenditure as per cent of estimated GSDP is not even crossing 2 per cent in FY21.

(With Chitleen K. Sethi in Chandigarh)

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