The Centre's fiscal management of the Covid crisis vis-a-vis availability of funds to states might result in creating a coercive, rather than a cooperative federalism.
Prime minister Winston Churchill famously remarked: “Never let a good crisis go waste”. Prime minister Narendra Modi clearly concurs wholeheartedly. Not in the modern-day, somewhat wussy interpretation of using such an opportunity to push through hard reforms, but in the original Churchillian sense—use it to fix your political opponents. Over the past few years, the BJP has been steadily losing ground in state elections; and more and more states are aggressively asserting themselves. This must surely have been most damaging to Modi’s amour propre. The SARS-CoV-2 pandemic has given him just the opportunity he needed to set things right.
When the pandemic started in India, since health is a state subject, individual states reacted as best they could under state-level legislations. Containment, detection, and treatment were all being carried out by them; the Centre was nowhere in sight. The only measure taken was the announcement of the PM Garib Kalyan Yojana—essentially, a centrally conceived and implemented direct benefit transfer (DBT)—which did nothing to help the states bear the costs of managing the disease and hunger, but garnered political goodwill for the beneficence of the central government (although the net amount involved was a measly 0.4% of GDP).
Then, on March 24, the PM, in his usual muscular shock-and-awe style, announced a nation-wide lockdown—the most comprehensive and draconian in the world. In particular, more than 60% of all economic activity was shut down with no notice. Only certain listed “essential goods and services” were permitted, and that too with riders. What was not mentioned, of course, was that practically all state taxes (mainly GST) accrue from “non-essentials”. It is certainly true that the Centre also loses an equal share, but it does have other taxes which would continue—income tax, corporate tax, and customs duty. The net result was a sudden and sharp drop in states own taxes exactly at the time when their expenses shot up.
It should be remembered that the states, unlike the Centre, face a “hard budget constraint”, which means that they can spend only what they get from taxes, and from what the Centre approves as state market borrowings. To be sure, the Centre has been punctilious about releasing the states’ share of central taxes as per the Finance Commission award, but not a paisa more than that. In particular, the arrears on GST payments have yet to be released.
However, state borrowing limits were raised. In desperation, many states have floated additional state government bonds and, quite predictably, have paid a high price for it. The interest rate on these additional bonds shot up by about 1.5 percentage points from around 7.5% earlier, which means an additional future interest payment liability of about 20% on these borrowings.
The Centre can still borrow at less than 7% interest and on-lend to the states, but there has been no change at all in its borrowing programme and, clearly, this is not on the cards. This sad state of affairs is likely to continue for a while, and the states will end up with a large permanent liability on their budgets.
The powers-that-be must have noticed at some point that the original list of “essential goods and services” had two items which provided some succour to state tax revenues—alcohol, and e-commerce. Almost all states, other than those with prohibition, collect somewhere around 30-40% of their own tax revenues from alcohol; and e-commerce (particularly e-retailing) permits the sale of non-essentials, on which GST would be payable. This, of course, could not be countenanced; and, while extending the lockdown, these two were banned as well, without any ostensible reason.
These steps have been noticed by several observers, but there are others as well that have been slipped in without much comment. First, the Centre has quietly announced expenditure cuts of 5-10% on all ministries and departments except 10, which may be further extended. Having been in this game for many years, its outcome is quite evident to me—the entire cut will be made on Centrally Sponsored Schemes (CSS).
The CSS are schemes which are implemented by the states but financed by the Centre, and constitute a significant portion of the non-statutory transfers from the Centre to the states. Second, the crash in world oil prices created an opening for additional resource mobilisation for oil-importing countries. The Centre pre-empted the entire space before the states even became aware of the possibility. Third, the central power generating companies have demanded that states make advance payment for any electricity they purchase, thereby posing a difficult dilemma for the states.
If all of this was not enough, the Centre has added insult to injury: the PM-CARES fund. An opaque, discretionary, and apparently non-auditable fund that has been made eligible for the use of CSR expenses of corporates—a provision not extended to the Chief Minister’s Relief Funds that all states have for meeting humanitarian needs.
When all the smoke and dust clear, Narendra Modi would have achieved the cooperative federalism that he had promised right at the beginning of his prime ministership; with a little twist—“cooperate; or else …”