Coughing Losses: Indian States Subject to Austerity

As the number of COVID-19 cases continue to burgeon around the globe, most countries are experiencing an unprecedented slowdown with a shrinkage in economic activities. The already prevailing global slowdown in the pre-corona months has fused with the present-day scenario, resulting in an economic jolt. The ‘Great Lockdown’ as the IMF calls it, will give birth to economies with lowered interest rates and public debts reaching record levels.

India stands as the third worst-hit country globally with a tally nearing 700,000 cases. Looking deeper into the domestic circumstances, it is an unfortunate coincidence that the five gravely affected Indian states: Maharashtra, Tamil Nadu, Delhi, Gujarat and Uttar Pradesh, constitute 42% of India’s GDP. It is estimated that these five will make-up 48% of the total losses all the states will incur in 2020-21. Dried-up cash inflows have disconcerted both the Union and State Governments, however, as the actual battle is being fought by the State Governments and they are incurring the associated expenditure, the hardship is greater for them. With grave fiscal constraints, dealing with the loss of livelihoods has become a matter of concern for most states just as saving lives has. Cash handouts and provisions for subsidised food/ration have been put in place by states as humanitarian expenditure, not to ease the crisis. The return of migrant workers has exacerbated the problem with the disbursement on transport, quarantine facilities and rehabilitation.

Quite ironically, the ₹20.9 trillion stimulus package, which has been claimed to be 10% of the national GDP by the Union Government, is, in fact, an exiguous 0.8% of the GDP, as authenticated by a DSB Bank report and several other experts. This is one reason why the States have been demanding resources from the Union Government. The prime reason still lies in the fact that all the influential contributors (states) generated 60-70% of revenue from their own sources. These states gave us 75% of the GDP generated and hence, were the driving engines of the national economy—and therefore need and deserve more financial packages. Moreover, due to the already existing economic crunch that had affected the nation even before COVID-19, State Governments have been experiencing serious revenue impediments through the second half of 2019-20.

Value Added Tax (VAT) on petroleum and excise duty on alcohol are the two predominant sources of revenue for states. Alcohol fosters the generation of ₹150 billion for states, on average, every month, along with ₹2 trillion brought in by petroleum products. The lockdown witnessed a plunge in the demand for petroleum and a collapse in the sale of alcohol, drying up the states’ revenues. The states generating a major portion of finances through their own resources are worst affected owing to this.

Even as the lockdown begins to ease out, relief is a far away dream for the states, liquor vendors are expecting a 25% fall in sales this year and bars have barely witnessed any footfall. Even though Delhi increased the excise duty on liquor, the gains weren’t fruitful enough to make good the deficit. Although oil prices in the international market stand truncated, the Union Government has continued to keep the prices high along with an escalation in the central excise duty to make good its deficit, so even if states increase VAT on petroleum, they are left with a very cramped taxing area.

The Goods and Services Tax (GST), which is collected by the Centre and then shared with the states comprises 43-44% of the revenue. Ever since its implementation, states have complained of revenue losses. One principal reason for this is the delayed and uneven release of the GST compensation. Compensation for December 2019 to February 2020 was released only in June, this led to much hue and cry as the states were starved of revenue during the lockdown. The Union Government’s assurance of a 14% annual growth for the next five years in the states’ GST revenue concoct mere dreams as the target is highly unachievable as they are likely to grow at a much lower rate. The only escape is borrowing, either the Centre borrows to issue grants to the states or the GST Council will have to borrow in order to keep pace with the share of compensation due to the states during these times.

With the crisis in hand, the Indian states have limited recourse. They can either cut down on their budgeted expenditure or increase tax buoyancy or increase their borrowings. Expenditure taps in the form of salaries, pensions, allowances, interests, etc. have already been turned off by many states as a cut in salaries, freezing of allowances and increments have been ordered by the State Governments. This compression of public expenditure is unlikely to provide the desired results. Borrowing from the market looks like candy to the eye and shall curb the issue of revenue in the short run, but states can’t afford to ignore the hindrances in borrowing, such as an expansion of the fiscal deficit in the long run. The second reason looks more political in nature, the Centre has inflicted four conditions on states – universalisation of ration cards, improvement in ease of doing business, reforms to make state-owned power distribution companies more profitable, and shoring up urban local body revenues. On the one hand, these conditions restrict the borrowing tendency of the states and on the other hand, the Centre has conveniently brimmed-up their coffer from ₹4.2 trillion to ₹12 trillion by inflating borrowings by 54% over the estimated budget.

The nation joins hands to fight the contagious virus but it seems that there is a grave disagreement between the States and the Centre when it comes to revenue generation, allotment and financial grants. The Centre curtails the income opportunities of the States through numerous constraints, yet expects States to fight the crisis on their own. The States look for grants in order to release the salaries of their employees and expects the Centre to reveal a package of at least 4-5% of the GDP. Many economists believe that an addition to the 15th Indian Finance Commission report, which allocates financial resources between the Centre and the states, in the form of a COVID-19 grant to states shall be a helping hand. A collaborative effort towards a common strategy aimed at rooting out the pandemic to ‘mask the losses being coughed by the states’ is the actual need of the hour.


Vanshika Sighroha

A woman with opinions and confidence to voice them out freely, I am currently pursuing my majors in Economics. With a love for food, books and movies, I also love to write and further expand my horizon. I find my solace in travelling and good music!

The Pangean does not condemn or condone any of the views of its contributors. It only gives them the space to think and write without hindrance.