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States bleeding, pay dues ASAP, relax FRBM levels etc

The Financial Express

It is not clear if the state chief ministers, with whom the prime minister spoke on Thursday-on ensuring there wasn't a rush of people on the streets once the lockdown ended on April 15-got to discuss their finances with him, but they are desperate. And, while most have argued that the Centre needs to increase its expenditure dramatically to prevent a recession, state governments collectively spend more than the Centre does; this makes their finances critical. Thanks to a massive shortfall in central tax collections, the states got around Rs 2-2.25 lakh crore less of tax devolutions than what was budgeted for FY20. This shortage will continue into FY21 since real GDP growth is expected to be around 0.5-2.5%. Right now, states are budgeted to getRs 7.8 lakh crore of tax devolutions, or an increase of Rs 1.2 lakh crore over FY20, but there is little chance of this target being achieved. Of the likely FY21 shortage, GST losses will be huge in the next 2-3 months, to the tune of around Rs 20,000-25,000 crore per month at least.

This is the Centre's fault since few predicted such an economic collapse, though a 10% projected nominal GDP growth for FY21 was optimistic, even in February. Given the situation we are in, it is clear the central government needs to do something; several states have already started deferring salaries and, as time goes by, they may even have to cut them. And, to the extent that there is limited room to do this, the axe will fall on other expenditure, which includes critical capex.

Ideally, the Centre needs to do two things. To begin with, it must pay all its dues immediately. Going by the letter the West Bengal CM wrote to the prime minister, the Centre owes the state Rs 35,000-40,000 crore as its share of various central and other schemes; details for other states are not immediately available. In addition, GST compensation dues till now are around Rs 30,000 crore; of course, if the cess doesn't generate such funds, it is difficult to argue that the Centre needs to dip into its coffers to pay this.

Since the Centre can't possibly compensate the states for the fall in their share of tax devolutions, the best solution is for it to apply to the states the same yardstick it is applying to itself. The Centre finds it easy to breach the fiscal deficit and, this time around, there is even talk of going back to the decades-old automatic monetisation of the deficit by the Reserve Bank of India (RBI); it needs to allow a similar facility for the states by raising the FRBM limit for them. Perhaps, RBI should consider participating in some part of the state government bond issues as well. Apart from the fact that the states need money if they are to meet their obligations, it is unfair that a large part of the corona burden, by way of setting up hospital/isolation facilities and even taking care of out-of-work people vis food, kitchens, etc, will have to be borne by the states while little is being done to augment their revenues.