Even as corporate, small, medium and micro enterprises [MSMEs], tens of million workers in the informal sector, self-employed and all others impacted by the Covid-19 pandemic are demanding relief package from the union government, the states too have pitched in with a volley of demands which have huge financial implications. This came to the fore during a video-conference held by the Prime Minister, N Modi with chief ministers on April 26, 2020 to discuss the exit strategy after the current lock-down ends on May 3, 2020.
Five opposition ruled states have sought close to Rs 225,000 crore: Maharashtra, Rs 50,000 crore ; Chhattisgarh, Rs 30,000 crore; Kerala, Rs 80,000 crore; Rajasthan, Rs 40,000 crore and West Bengal [WB] Rs 25,000 crore as immediate compensation to the revenue loss suffered because of the national lock-down. Further, Rajasthan chief minister, Ashok Gehlot has proposed setting up of a Rs 100,000 crore national Covid-19 management fund from which the states can get money as and when needed. This is supported by Mamata Banerjee, who also wants Rs 10,000 to be given to every worker from the un-organized sector, MSMEs, farmers and tea garden employees besides increasing the rural job guarantee under MGNREGA to 150 days.
Punjab CM, Amarinder Singh has asked for a revenue grant for the next three months, with flexibility to spend as per local conditions; bonus to farmers for staggered purchase of wheat; direct cash assistance to daily wage industrial and agricultural laborers; allow contributions to CM relief fund as a fit charge under CSR [corporate social responsibility] on the lines of PM Relief Fund/PM Cares fund.
The above demands are in addition to other pending demands such as immediate release of pending GST compensation for December 2019 – January 2020; increase the borrowing limit from 3% of the state gross domestic product [GDP] under the Fiscal Responsibility and Budget Management [FRBM] Act to 5%; suspending repayment of all state development loans for a period of three months; allow flexi-funds under Centrally sponsored schemes [CSS] for Covid-19 management and further increase in their Ways and Means Advances [WAMA] limit which helps them borrow more; deferring Payment of GST Advance Tax and IT for six months by MSMEs.
The above demands are accompanied by wielding threat which is manifest in different forms. While, on one hand states such as Kerala, Maharashtra and Punjab have exhorted that they won’t be able to pay salaries for the month of April, 2020 if the Centre does not release funds immediately, on the other Jharkhand chief minister, Hemant Soren has threatened to take the Centre to the court, if it failed to compensate the state for its huge revenue loss.
In a crisis situation, when the devastation caused is widespread affecting tens of million and the atmosphere is surcharged, any demand even if it happens to be ‘unreasonable’ – even crossing absurd limits [for instance, in case of Maharashtra even as an official communication from the state puts the figure at Rs 50,000 crore, a letter addressed by Sharad Pawar, leader National Congress Party (NCP) – a partner in Uddhav Thakre led government – to Modi seeks ‘untied’ assistance of Rs 100,000 crore] carries enormous appeal.
Do these demands have any correlation to actual requirement in the concerned state on ground zero? Have they also included pending demand un-related to Covid – 19? Have the states taken into account the assistance that Centre has already announced under its own package? By putting up inflated demand are states not taking undue advantage of the principle of cooperative federalism?
The answer to the first two questions, only the concerned state would know; or it can be ascertained by the bureaucrats/experts in the Centre on careful scrutiny of facts. The third has a crucial bearing on what the states should [or should not] be asking for. So, what is it that the Centre has already given or promised?
The Centre has promised to release during the first ten months of the current financial year till January 2021, 70% of the share of the Central taxes to states [as per the 15th Finance Commission recommendation] which works out to Rs 550,000 crore. The important point to note is here is that this is based on budget projection of total devolution to states at about Rs 800,000 crore. Thus, even if Centre’s tax collection declines which is inevitable [courtesy, Corona effect], the funds available to states won’t face any cut.
It has also released a portion of pending GST compensation despite facing shortfall in cess collection [under the extant arrangement – included in the constitutional amendment Act on GST – the cess levied on de-merit items in the highest slab 28% is used for giving compensation to the states for the difference between state’s actual revenue and the targeted figure]. For this purpose, it has not only used the surplus from the previous year but also borrowed money to ensure that the states are not left high and dry. The government has also given help to states through release of first installment of money for the Centrally funded schemes.
It has also goaded the Reserve Bank of India [RBI] to allow 60% increase in the Ways and Means Advances [WMA] limit of state governments [these borrowings are intended to help them to tide over temporary mismatches in cash flows of their receipts and expenditures; however, it is required to be returned within three months] over and above the level as on March 31, 2020.
Taking a cue from the recommendation of the NK Singh committee on review of the FRBM Act [2003] which permits breach of the fiscal deficit [FD] target by 0.5% in case of “far reaching structural reforms with unanticipated fiscal implications” [the finance minister (FM), Nirmala Sitharaman relied on this to have a deviation of 0.5% in FD of the Union Budget], the centre has also allowed states to breach the existing ceiling of 3% of state GDP by 0.5%.
The funds available through the above 4 routes should help in addressing the resource crunch faced by states. The increase in WMA limit by 60% will put about Rs 50,000 crore at their disposal. Likewise, relaxation in FRBM limit gives them additional leeway. For instance, Maharashtra will be able to borrow Rs 15,000 crore extra [0.5% of about Rs 3000,000 crore being the state GDP]. Further, states getting their share of taxes from Centre’s kitty [even when the latter is unable to collect] also helps immensely. In regard to GST compensation, GOI is doing its best to clear the pending dues.
In addition, under PM Gareeb Kalyan Scheme [PMGKS], the Centre is giving Rs 170,000 crore directly to the beneficiaries. This includes 5 kg of rice or wheat per person per month for ‘free’ to around 80 crore people for 3 months; Ex gratia of Rs 500 per month to Women Jan Dhan account holders [20 crore]; Rs 2,000/- under PM KISAN to about 9 crore farmers; ex-gratia amount of Rs 1,000/- for 3 crore widows and senior citizens; free gas cylinders to 8.3 crore Women Ujjawala sheme beneficiaries and Rs 20 hike in wage under MGNREGA.
Furthermore, state governments can use the welfare fund for building & construction laborers [it has around Rs 31,000 crore] to help construction workers; funds under the district mineral fund [DMF] for testing activities, medical screening and providing health care to fight the pandemic. Under the Deen Dayal National Livelihood Mission [DDNLM], Women Self Help Groups [SHGs] can get collateral free loan up to Rs 20 lakh to benefit 630,000 SHGs.
GOI is also paying the EPF contribution of both the employer and the employee or 24% for 3 months for entities with up to 100 employees, 90% of them earning less than Rs 15,000/- per month. Those riders have since been withdrawn.
The benefits under the above schemes are accruing to tens of millions spread all over the states. Likewise, measures taken by the Reserve Bank of India [RBI] to provide more credit, reduce cost of credit and ease norms for stressed assets help entities – both in formal and informal sector – located in states. The state governments need to internalize all such assistance in their calculations and make up a case for incremental support, if required. But, that is not happening.
Instead, their sole aim is to grab from the Centre as much as possible – unrelated to their requirements. For instance, when Sharad Pawar wants Rs 100,000 crore, the argument given is that this is needed ‘to compensate for the revenue loss due to lock-down’. Is it his case that the state has lost this much revenue during the 40 days? This is bizarre. If, this is the projected loss for the whole year, then also the demand put up now is totally unjustified.
How the situation will unfold after exit from the lock-down? This can’t be said with any certainty. One can’t rule out a V-shaped recovery [as alluded to by the chief economic adviser]. Even if there is contraction [under worst case scenario], then also the shortfall in collection can be addressed later. There is no justification whatsoever for seeking immediate release of funds.
The states need to take an ‘objective’ and ‘reasonable’ view on their demands. They should correctly assess the amount needed for medical requirements and livelihood concerns during April – June, 2020 [period beyond this is irrelevant for now]. Then, consider what is already being given by the Centre and RBI. If, still some funds are needed, request for the incremental should be put up.
The states also need to ponder that the Centre doesn’t hold an Aladdin Lamp [unless they are thinking that the latter can ask RBI to print as many currency notes as it wishes] and accordingly moderate their demands.