Modi govt must give urgent financial support to states; SBI research suggests ways how centre can do it

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August 24, 2020 1:00 PM

SBI Research said that the centre has the option to directly transfer the combined full amount of Rs 54,000 crores from the SDRMF and NDRF. 

state funds, funds to states, WMA, state borrowings, economic crisisThe government has the option to transfer at least half of the remaining Rs 2.5 lakh crores through a further hike in WMA limits

As the economic activity across states takes a toll due to local lockdowns and surging coronavirus caseload, there is an immediate need to provide financial support for states in some form or the other. However, given the overall slowdown in the economy, the central government, too, has a little window to provide assistance to the states. Consequently, the latest SBI Ecowrap report suggested ways through which the centre can help the states without making a major dent in its coffers. The report said that the centre has the option to directly transfer the combined full amount of Rs 54,000 crores from the State Disaster Response Fund (SDRMF) and National Disaster Response Fund (NDRF). 

Further, the government may transfer at least half of the remaining Rs 2.5 lakh crores through a further hike in WMA limits, supporting additional borrowing of states through Open Market Operations by RBI, and relaxing some of the conditional ties associated with borrowing. The centre had decided to increase the borrowing limits of states, giving extra resources of Rs 4.28 lakh crore. However, the SBI research suggested that only 8 states are in the position to fulfil all the conditions of the government and can avail 2 per cent of GSDP as extra borrowing. The findings indicated that out of Rs 4.28 lakh crore, only Rs 3.13 lakh crore might be actually borrowed by the state governments in the current fiscal.

Also Read: FM Sitharaman remembers Arun Jaitley’s legacy, recounts GST benefits as ‘best way to pay tribute’

The State Bank of India said in its report that the states are the most vulnerable as they have limited source of own tax revenue and the fund transfer to states will support health and immediate payment to contractors for infrastructure work. The move will likely reduce the stretched working capital cycle, and boost employment and demand.

Meanwhile, the pandemic may lead to a loss of Rs 3 lakh crores in Own Tax Revenue across states. Also, a very basic assumption of loss of an entire month’s revenue in components like State VAT, excise, stamps and registration is expected to bring down the revenue for Q1 FY21 at around Rs 53,000 crore. The centre had recently released GST Compensation for FY20 at Rs 1.65 lakh crores. 

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