Seven steps states can take to strengthen fiscal position amid COVID-19

The state governments are staring at an acute financial crisis. Two months of lockdown have put a strain on their revenues with industrial activity at a standstill. 

In their video meetings with Prime Minister Narendra Modi to discuss the coronavirus pandemic, chief ministers cutting across party lines have demanded more financial assistance from the Centre to tide over the crisis.

A political slugfest over this has already started with Congress chief ministers blaming the Centre for not providing any financial aid.

Maharashtra alone is expected to face a revenue loss of Rs 40,000 crore in March-April on account of lockdown. The government will need to borrow at least Rs 15,000 crore to Rs 20,000 crore to pay salaries for the three month period April to June, according to news reports.

Precarious Financial Position of States:

  • The growth slowdown due to lockdown will result in weaker revenue for states, especially collections from the goods and services tax (GST).
  • While the states’ fiscal deficit ratio has remained within the FBRM mandated threshold of 3% till now, their ability to meet this goal in FY2021 is highly doubtful.
  • The leverage position of states has deteriorated over the last five years with outstanding dent now at 25% of GDP, posing medium-term challenges to its sustainability, according to an RBI study.
  • High leverage has constrained the debt service capability of states. Haryana, Punjab, Kerala and West Bengal have debt burdens above 200% and debt service over 30% of operating revenue, as per a Moody’s report.
  • Eight states Andhra Pradesh, Haryana, Himachal Pradesh, Kerala, Maharashtra, Punjab, Rajasthan and Tamil Nadu are currently in a revenue-deficit position. 
  • States such as Chhattisgarh, Assam, Tripura and Uttarakhand have also seen revenue deficits in the last few years. More could be added to the list in the aftermath of COVID-19. 

What could states do to bolster revenue and their financial position?

1. Increase VAT on fuel

Brent crude prices have fallen from $68 a barrel to below $30 a barrel in 2020. This provides an opportunity for states to hike value added tax on petrol and diesel.

Delhi has taken the lead by increasing VAT on petrol by 3% and diesel by 13.25%, followed by Uttarakhand. This will also help negate the decline in tax collections due to reduction in demand for fuels. In April, amid lockdown demand for fuels declined by 70% in India. 

In the first nine months of 2019-20, the total sales tax/VAT collected by state governments on petroleum products was ₹1.44 trillion, making up 15%-20% of own tax revenues of states. 

2. Cess on sin items like alcohol 

India witnessed big queues across cities after liquor shops opened up in Lockdown 3.O. Critics fear non adherence to social distancing norms could lead to a spike in cases. Mumbai shut down the liquour stores after two days. Many states are allowing them to remain open.

Delhi has again taken the lead here by levying a special corona fee of 70%. Andhra has levied a special tax of 75% while West Bengal 30%. Several state governments in India control liquor retailing or wholesale distribution or both and it is a major source of their revenue. This will not receive backlash from people. Sin products have been taxed aggressively by governments time and again and this time it will be no different. 

According to CIABC, alcohol contributes nearly Rs 2 trillion to state governments’ coffers during a fiscal, making up 10%-15% of own tax revenues of states. 

3. Increase taxes on real estate transactions

Taxes on property and capital transaction accounted for 11.3% of states own revenue collections in 2019-20. The lockdown has impacted the number of property registrations across the country. Revenue generated from registration of documents in Mumbai has declined from Rs 377.13 crore in March to a meagre Rs 43,547 in April. 

In 2019-20, state governments had hoped to earn a total of ₹1.60 trillion from taxes on property and capital transactions.

4. Delaying payments of vendors

Though not advisable, some states may not have any other option. Delaying payments is likely to increase the fund flow position of state governments and help them tide over the crisis. MSMEs could be spared and payments delayed of only big firms.

5. Pay cut for government staff 

When employees in private sector are losing jobs and suffering pay cuts, why should government staff be insulated? That too, when many would not have been able to work from home due to nature of their role, lack of digitization etc.

Half a dozen state governments have announced cuts in employee salaries or deferment of payment. Deferments also helps improve fund flow and reduce borrowings. 

6. Suspension of MLA Development funds

Central government has already announced suspension of MPLAD Funds scheme for 2 years. States could follow suit given the crunch. Assam and UP have already announced this. Other states could do the same as well.   

7. Give it up campaign

States can run a give it up campaign like central government ran for subsidy on LPG cylinders. Across states a high number of people are availing the schemes for the poor, much higher than the people below poverty line.

The National Food Security Act (NFSA) covers 75% of population in rural areas and 50% in urban areas. People who have moved up the ladder can be coaxed to give up their subsidized ration entitlement.

To sum up, exceptional circumstances call for exceptional decisions. The state governments will need to come up with innovative strategies to fight COVID-19’s impact on their finances. 

This Article has been originally published here

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