New Delhi/Mumbai/Chandigarh/Kolkata: Karnataka has had to increase its borrowing compared to last year by 400 per cent. Maharashtra and Tamil Nadu are in the same boat — their borrowing has increased by 224 per cent and 107 per cent respectively. West Bengal has been ravaged by both the Covid-19 pandemic and Cyclone Amphan, leaving its government scrambling to provide help to people. Other states have had to cut employee salaries and take other emergency measures.
This is the bleak reality of Indian states’ finances after the lockdown, even as the Covid-19 pandemic continues to rage. The contraction in the Indian economy has adversely impacted tax revenues at the same time as Covid-19 has forced a rise in expenditure, resulting in many states facing cash flow problems.
This fragile state of finances is also one of the major reasons why many states are openly confronting the Centre over the non-payment of GST compensation for the current fiscal.
The big picture
Data from the Reserve Bank of India shows that states resorted to substantially higher market borrowings in the first half of the fiscal to tide over their fund requirements.
In the current fiscal year, states and union territories raised Rs 3.11 lakh crore from market borrowings. A 15 September Care Ratings report pointed out that the borrowings were 52 per cent higher than the Rs 2.05 lakh crore borrowed by states in the corresponding period last year, indicating the revenue crunch faced by them.
The central government paid states their 41 per cent share in the central tax pool, according to the budget estimates, and not according to the actual tax collections in the two months of April-May, in order to help states with their cash flows. But this is now being adjusted to reflect actual tax collections.
States were transferred Rs 2.17 lakh crore in the five months up to August, finance ministry data shows. While Rs 92,000 crore were transferred to states in April and May (a monthly average of Rs 46,000 crore), Rs 1.25 lakh crore were transferred between June and August (monthly average of Rs 42,000 crore).
At the same time, the states have not been paid compensation arising from the implementation of GST for the April-July period, with the Centre citing lack of collections of the compensation cess. The government had pegged that the shortfall in GST revenues for states could be as high as Rs 3 lakh crore in 2020-21, with the April-July period accounting for the majority it.
“The tussle between the central government and states has come to the fore recently. When one looks at the states’ finances in 1QFY21 (first quarter of financial year 2020-21), the bone of contention becomes clear as day,” stated an 11 September report of Motilal Oswal Institutional Equities.
Using monthly accounts available for 14 states, the report pointed out that the total receipts of the states declined 18.2 per cent in the April-June quarter as compared to the year-ago period, but spending remained at similar levels. This pushed up the states’ fiscal deficit to 36.5 per cent of the full year budgeted numbers in the three-month period, more than double the levels seen in previous years, it pointed out.
The decline in revenue receipts of states is led by a sharp contraction in GST revenues. State GST revenues declined 30 per cent in the April-August period to Rs 2.72 lakh crore from Rs 3.9 lakh crore in the corresponding year-ago period, according to finance ministry data.
Karnataka’s market borrowings rose by 400 per cent to Rs 25,000 crore this fiscal, as against Rs 5,000 crore in the corresponding year-ago period, as its revenues contracted sharply.
The BJP-ruled state saw its GST revenues contracting by 28 per cent to Rs 24,763 crore in the April to August period. The total GST compensation due to the state was Rs 13,763 crore for the April-July period.
Looking to curb its expenditure, the state cabinet has approved a 30 per cent cut in MLA salaries for a one-year period.
Maharashtra, the biggest state in terms of gross state domestic product (GSDP), faced a sharp fall in revenue collections, necessitating a cut in development expenditure. However, the state is paying its salaries in full, even as it has borrowed Rs 40,500 crore from the markets in the current fiscal, a 224 per cent increase over the previous year.
In the first four months of the fiscal, the state faced a shortfall of almost Rs 22,000 crore in GST collection.
“This is almost a 30-35 per cent drop in GST revenue. It’s significant as GST constitutes nearly 50 per cent of our own tax revenue. We have faced a similar shortfall in the collection of other major taxes as well,” said a senior official from the state finance department who did not wish to be named.
The official added that the state faced a substantial hit in the value added tax collection as well, because consumption of petrol and diesel plummeted due to the lockdown and the slowdown in economic activity in the past four months.
Revenue from stamp duty also dropped as real estate transactions were sluggish, the official said.
The fall in revenues has also led to a cut in planned expenditure. In a government resolution in May, the state government implemented a 67 per cent cut in development expenditure and strictly ordered all its departments to not take up any new projects, and review and drop all non-performing ones, or those that are not essential and haven’t yet taken off.
“We are approving new projects only for priority departments such as medical education and drugs, public health, nutrition — that is, women and child development,” the official said, adding that the only other exception is the job-creating infrastructure sector where some proposals have been cleared.
The official added that going ahead, tax revenues may see an uptick, with the state unlocking slowly. The slashing of stamp duty rates should also help, he added.
Tamil Nadu, the second largest state in terms of GSDP, faced a GST shortfall of more than Rs 12,250 crore in the first five months of this fiscal year. At the same time, its additional expenditure increased by Rs 7,000 crore as it upgraded health facilities and provided Covid-19 relief.
Tamil Nadu was the largest borrower this year among states, with market borrowings amounting to Rs 46,000 crore, an increase of 107 per cent over the corresponding year-ago period.
Chief Minister Edappadi Palaniswami, in a letter to Prime Minister Narendra Modi, had stressed the need for access to immediate resources to undertake regular budgetary expenditure for schemes to restart the economy.
West Bengal is looking at an increasing debt burden and huge financial strain on its exchequer as it deals with the twin impact of Covid-19 and Cyclone Amphan. However, the state has been making timely salary payments to its employees and has also released festival bonuses for Eid and Durga Puja.
Chief Minister Mamata Banerjee has repeatedly been saying that the state has “no earning and only burning”, which means that the government has not been earning any revenue for last five months, though it needs to manage Covid pandemic, build infrastructure, and additionally, spend on damages across the state caused by Cyclone Amphan.
The state government has announced that it has already spent Rs 2,500 crore in Covid management, while over Rs 6,600 crore were released towards meeting Amphan damages.
Bengal Finance Minister Amit Mitra, in a press conference last month, had said the GST revenue shortfall for West Bengal will be around Rs 15,000 crore, or 1-1.5 per cent of the state’s GDP. “We have managed to pay salary on the 1st of every month and we are still managing our debt on the brink,” he had said.
West Bengal is a debt-ridden state and spends over Rs 50,000 crore for debt servicing annually.
Punjab’s gross GST revenue collection has also plunged 31 per cent in the April to August period to Rs 3,630 crore. Punjab’s GST compensation dues for the April to July period are Rs 6,965 crore.
In addition to GST, Punjab also collects tax revenue from value added tax on alcohol and petroleum products. These have also declined in the April-August period.
State Finance Minister Manpreet Singh Badal had pointed out in a press conference last month that Punjab’s monthly salary bill was Rs 1,800 crore, adding that the Centre’s refusal to pay the GST compensation amount was making it difficult to run the state.
Not all states are paying salaries and pensions to government employees on time. For instance, Telangana has deferred payment of a part of their salaries and pensions for six months with the pandemic squeezing revenues.
Kerala also extended salary cuts for its government employees for another six months till the end of the fiscal year, as it looks to tide over the cash crunch.
Uttarakhand, last month, announced it will cut salaries of its legislators.
Jharkhand CM Hemant Soren had also flagged to the PM that the state is hard-pressed to pay salaries of government employees, as the Centre has not paid it GST compensation for the Rs 2,500 crore revenue shortfall it incurred in the first five months of this fiscal.
Capital expenditure under threat
N.R. Bhanumurthy, vice-chancellor at Bengaluru’s Dr B.R. Ambedkar School of Economics University said the first “victim” of this revenue shock could be capital expenditure.
“States will cut back on capital expenditure with drying up of finances,” he told ThePrint. But he added what is even more worrying is that states may also be finding it difficult to meet revenue expenditure like that related to the health sector, salaries and pensions.
Bhanumurthy pointed out how states’ revenue mobilisation has worsened since the implementation of GST, with states more dependent on the Centre. However, he said a few states may still have some option to increase their revenues by doing away with the implicit subsidies they provide — such as on power, water and transport.
(With reporting by Madhuparna Das and Chitleen K. Sethi)
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