Tough time ahead
One of the major drawbacks of Covid-19 has been the increased fiscal woes for the states. Reports that various states are facing severe cash crunch is becoming a reality now. States like Maharashtra, Punjab, Karnataka and Tripura are among the states reporting delays in salary payments to even healthcare workers. In Uttar Pradesh, Telangana, Karnataka and Madhya Pradesh, salaries have been delayed to staff of educational varsities also.
The developments have surfaced after subsequent lockdowns were announced since March this year to contain the deadly Covid-19 virus which has in the long run put finances of over a dozen states under severe strain. The increased stress has resulted in delays in salary payments and sharp cuts in capital expenditure outlays.
These outcomes have been reflected by a majority of the states as things will move towards getting more complicated as the lockdowns enter the fully reopening mode. The stress in finances has left states with little space for increasing capital expenditure, an area of growing concern given that over the last few years, with states, cumulatively, spending about one-and-half times more than what the Central government does.
The financial stress also comes at a time when states have been forced to hike their spending on health to counter the pandemic and at the same time the Union government has failed to release the GST share to the states for the past four months now.
Interestingly, for the states and UT’s, GST accounts for almost 42% of their own tax revenues. With the GST compensation payments stuck up for the last four months, many states have been forced to put on hold their capital spending. These states and UT’s are struggling to pay monthly salaries to staff.
The Union government on its part allowed states to borrow up to 5 per cent of their GDP this year, up from 3 per cent, the conditions imposed for this ensures that only eight states qualify for this relaxation.
The states for now can only bank on seeking unconditional fiscal deficit limits and availing it to clear all outstanding bills including salaries and other spending. But will the union government approve it, will depend on how the states will be able to project their case.
Worryingly, the Reserve Bank of India (RBI) has said that demand in the economy will take quite some time to mend and that an assessment of aggregate demand during the year so far suggests that the shock to consumption is severe.
Therefore, the government needs to spend more, not lend more so that the money can reach the people and help increase their purchasing power to restart economy by consumption.