States May Have to Bear Disproportionate Burden of Spending to Revive Economy, Stave off Mass Hunger

The economic fallout of the Covid-19 pandemic has roiled fiscal estimates of state governments, with revenue shortfall widening and expenditure rising exponentially.

Lakhs of hungry mouths have to be fed from state coffers, healthcare expenditure has risen manifold and there is the additional burden of reverse migration as workers return to home states, even as revenue sources have simultaneously dried up.

The Centre is still mulling over the quantum and contours of any fiscal stimulus to revive the moribund economy amid this unprecedented financial emergency. And all available indications point to a measly package from the Centre, as and when it comes, despite economists and stakeholders seeking a package worth at least 3-4 per cent of the GDP to begin with.

In such a grim scenario, those state governments which are in a comparatively better fiscal position than others may need to shoulder a disproportionate share of spending in the coming months, to revive the economy and stave off mass scale hunger.

Instead of turning off the spending tap, as some large state governments have already begun doing, the comparatively well off ones may need to actually raise their expenditures for the state economy and the national economy to revive.

Take the case of Maharashtra, which has said that each government department will now get just a third of the funds promised earlier, and that the state will postpone many approved works and not sanction any new projects. The state has also decided to cut salaries of government employees substantially.

The Delhi government has slapped an additional 70 per cent levy on liquor of all types from Tuesday, while also hinting that paying salaries to staff was proving to be a huge challenge since almost no revenues have been coming in since the lockdown began on March 25. Not just liquor, the state government has also raised excise duty on diesel and petrol by a large margin to make up some of its lost revenues.

Earlier, Telangana was among the first states to announce a steep cut in salaries of government employees to contain expenditure. Odisha, Rajasthan and some other states have also announced austerity measures to conserve resources. In a majority of states, spending cuts are slowly becoming apparent alongside a steep hike in levies.

An analysis by ratings agency Care Ratings shows that when budgets were announced at the beginning of the year, nearly every second state government in India had estimated a revenue surplus for 2020-21.

This was before the Covid-19 pandemic arrived, when 15 states and two union territories had then budgeted for a revenue surplus. And of these, nine states and one UT had estimated that not only will revenues be in surplus but their fiscal deficit will also remain under the mandated 3 per cent threshold.

Arunachal Pradesh, Assam, Bihar, Gujarat, Jharkhand, Karnataka, Mizoram, Uttar Pradesh, Uttrakhand and Jammu & Kashmir (UT) fell into the latter category of revenue surplus as well as fiscal deficit within the 3 per cent of GSDP mark.

West Bengal had budgeted for zero revenue deficit and fiscal deficit of less than 3% of GSDP while Odisha and Telangana had estimated revenue surplus plus a fiscal deficit of exactly 3 per cent of GSDP for 2020-21.

Delhi, too, had budgeted for a revenue surplus. Uttar Pradesh had estimated the highest revenue surplus among states at Rs 27,451 crore, followed by Bihar at Rs 19,173 crore, with Odisha and Assam estimated it at over Rs 9,000 crore.

Kavita Chacko, Rucha Ranadive and Sushant Hede of Care ratings said the states/UTs that budgeted a revenue surplus and a fiscal deficit of less than the stipulated 3 per cent of GSDP for 2020-21 could have the fiscal space to accommodate additional spending and higher borrowings.

“Nine states and one UT fall in this category. There are also states that have budgeted a revenue deficit/zero revenue deficit but have estimated their fiscal deficit to be contained at less than 3% of GSDP. As such they can undertake additional borrowings,” they said.

These analysts have also noted that states across the board have been resorting to market borrowings to fund their increased expenditure and state governments’ cumulative borrowings during April have already doubled compared to the same month last year.

Ratings agency Crisil has said that states with lower health preparedness and fiscal capacity while having a higher share of industry and services will be worse off. Punajb, Rajasthan, West Bengal, Andhra Pradesh and Bihar respectively are the most leveraged states across the country, with debt levels of more than a third of their GDP.

“States in which industrial and services sectors are predominant such as Maharashtra, Tamil Nadu, Karnataka and Kerala, are more vulnerable to this economic shock. Of these, Kerala and Karnataka have managed to contain the spread. Further, states with a higher proportion of labour in the informal sector (casual labour or with no valid job contracts) would have to implement more income-supporting measures, due to possible job losses during the lockdown,” the analysts said.

States like Andhra Pradesh, Madhya Pradesh, Uttar Pradesh, Rajasthan and Chhattisgarh are particularly vulnerable in this category.

So should the states, which had projected revenue surpluses at the beginning of the year and had their fiscal deficit well under control, go in for increased borrowings to pump their respective economies? Or should the states identified as vulnerable despite healthy fiscal projections adopt a cautious approach to spending?

Experts have said that income-support schemes and sector-specific relief measures imply state governments’

expenditure would certainly be more than budgeted earlier.

“The states’ fiscal deficits are already stretched, given the slowdown in economic growth seen before the spread of the pandemic. To deal with the shock, increased borrowing by states to finance expenditure in the coming fiscal is a sine qua non (absolutely essential.”

“In this situation, states that have managed to limit their debt or have high per-capita incomes would be able to push growth better. Lower debt implies states have the room to borrow more, while higher per-capita income implies a larger tax base. States such as Maharashtra – which has seen the highest number of Covid-19 cases – along with Tamil Nadu, Telangana, and Gujarat, seem to be relatively better placed in terms of fiscal position, with high per capita income and low debt ratios”.

Whichever criterion one uses to urge state governments to spend more, one thing is clear: the Centre has a limited number of options to revive the economy and the onus may lie largely on state governments.