GDP closely equals national income and is shared amongst three principal parties — labour, capital and government. It is obvious that the government’s tax incomes will also suffer. Despite doubling of excise duties on diesel and petrol, the central government is staring at a shortfall of Rs 3-5 trillion in tax revenues. The states will suffer larger tax income loss. Disinvestment and other non-tax incomes will also get upended. It would be a miracle if the government gets 50 per cent of the projected Rs 2.1 trillion from disinvestment. Expenditure obligations, with “economic stimulus”, are set to rise.
More than Covid-19 risk, the choice made to go for virtually a total lockdown, will seriously dent the Indian economy, government finances and business and household incomes.
The Rs 20 trillion stimulus announced by the Prime Minister should address some of these worries...
Fiscal stimulus, by its very nature, is additional fiscal burden on the public finances. The Prime Minister declared that the government and the Reserve Bank of India (RBI) would deliver a Rs 20 trillion economic stimulus, including the liquidity measures already taken by the RBI. It equals 10 per cent of India’s estimated GDP.
India has chosen to make fiscal stimulus
mostly credit oriented. RBI has already announced various liquidity facilities of over Rs 6 trillion. Much of the package announced for the MSMEs, clearing of power sector dues and liquidity for NBFCs etc on May 13 is also credit-based. The government has offered guarantees, which will turn into fiscal expenditure when these are called on default. This may take years and only for a fraction of fiscal stimulus
amount. The direct impact on central government’s finances in 2020-21 appears very limited.
The RBI assessment of April 17 drew satisfaction from the resilience of agriculture and allied activities, “on the back of all-time highs in the production of food grains and horticulture, with huge buffer stocks of rice and wheat far in excess of the buffer norms.” But won’t this bumper crop put even more pressure on government finances — both the Centre’s and states’ — in terms of support prices? And shouldn't these buffer stocks be liquidated: because surely there can’t be a bigger crisis of food than what we’re facing today?
India’s food economy is in quite a different space than it was in the 1960s or the 1990s. We produce more foodgrain than what is consumed in the country. We export food grains. Yet, the surplus produce ends up in buffer stocks. As market prices tend to be lower than minimum support prices, the government ends up buying lot of food grains. Over Rs 2 trillion is spent on food subsidy annually, which is about 15 per cent of the value of all crops.
Food grain stocks can be “liquidated” in two ways — export more or consume more. Given the widespread malnutrition, a legitimate response is to make under-nourished eat more food. The policy of supplying rice and wheat virtually free is aimed at achieving that. Additional 5 kg of free ration being distributed currently is also meant to ward off starvation for over 100 million workers who have lost their jobs. However, subsidised food distribution does not seem to have increased food grain consumption in the country. A more sustainable solution is to eliminate policy preference for food grain production, develop export markets and transfer food subsidy to poor in cash giving them choice of food.
State finances are under extreme pressure: There is no revenue — not from alcohol, tolls, property or petrol and diesel sales. But salaries and pensions will have to continue to be paid. Where will the money come from?
State finances, even in normal times, are straightjacket. About half of the states’ tax revenues devolve from share in central taxes. States have ceded policy control on SGST to GST Council.
Less than one fourth of state tax revenues — excise duty on liquor, stamp duty on property transactions etc — only is in state governments’ control. The states could collect only 10-25 per cent of their own tax revenues in April. Situation might improve somewhat in May but nowhere close to normal. States are staring at about 25 per cent less share in central taxes this year. States’ expenditures are completely inflexible. A lot of revenue gets spent on salaries, pensions, interest payments and implementation of centrally sponsored schemes (CSSs). Desperate state of finances has forced many states to defer salaries and allowances.
GST, CSSs, operation of Disaster Management Act
(DMA) and “stimulus” packages have fundamentally altered the basic nature of fiscal federalism in the country. From being a “cooperative federalism”, nature of fiscal relations between the Centre and the states has become very close to being “competitive unionism”.
States negotiated hard to get guarantee of 14 per cent compounded increase in their VAT revenues when Centre pushed GST. Centre negotiated and succeeded to limit compensation for five years. Massive shortfall in the GST revenues in 2019-20 created big tension between states and the Centre. The Centre first delayed. The GST compensation to the states has not been paid fully yet. The situation would be worse this year. The compensation demand might exceed Rs 2.5 trillion.
Centre is required to share 42 per cent of tax revenues with states. However, cesses and surcharges are not shared. CRIF levied on petrol and diesel is expected to yield additional Rs 1 trillion. But this will not be shared with states. Centre transfers states’ projected share (about Rs 8 trillion this year) in 14 instalments. There is every likelihood that the Centre would reduce the instalment amount soon. The Finance Commission recommended revenue deficit grants of Rs 74,340 crores for 14 states.
The Centre has provided only Rs 30,000 crores in the Budget.
The Centre controls states’ borrowings. While state laws limit borrowing to 3 per cent of the state GDP, the Centre decides the actual borrowing amount. The Centre has raised its borrowing by over Rs 4 trillion, more than 50 per cent over fiscal deficit
limit, in violation of the Fiscal Responsibility and Budget Management (FRBM) Act. The states have petitioned the Centre and waiting to be allowed more borrowing but the Centre has not yielded.
Stimulus packages announced by the Centre shifts states’ connect with households and small businesses to the Centre. Additional cash to over 200 million women and pensioners is delivered directly by the Centre bypassing the states. Credit to MSMEs under the package announced on May 13 will reach them under the cover of Centre’s guarantee.
Funds for the states to meet the expanding fiscal gap can come only from the Centre and by additional borrowings. States are fighting for their rights, but are at total mercy of the Centre. “Competitive unionism” is in real danger of becoming “fiscal unionism”.
Is this the time to undertake decisive, brutal economic reform? Like cutting government employment, abolishing unnecessary posts and rationalising the government workforce? Something state government should have done any way, given the digitisation of services?
Yes, it is time to undertake fundamental economic reforms. We are currently in the Economic Policy Reforms 2.0 cycle — initiated in 1990s. These reforms eliminated controls on private sector in production of goods and services. However, the government continued to be engaged majorly in production of private goods. The financial system of the country is still dominantly in public sector. Cost of bailing out the public sector — banks, telecom companies, airlines etc.— has risen massively. Infrastructure and capital investment have consequently suffered.
A fundamental re-division of production of goods and services between the government and private sector should form the pivot of Economic Policy Reforms 3.0. The government should be refocused on public goods and services like defence, police, justice, macro-economic stability, monetary policy, regulation of financial system, control of pollution and on merit goods like primary health and education. Government should leave production of private goods and services entirely to private sector.
Why should government be in the business of power distribution, banking, running colleges and universities, telecom and the like?
These fundamental reforms will lead to re-staffing of government. Those employed for production of private goods would go out to private owners. On the contrary, we need more judges, health workers, pollution controllers, economic offence investigators etc. The business re-engineering of government would throw up what is to be discarded and what is to be additionally hired.
Will 2020 mark the end of welfarism? Because there just isn’t money for it?
We are not a great welfare state though there are multiple programmes to deliver benefits to poor. We run numerous poverty alleviation programmes, including wage employment. We also target specific services like access to electricity, house, gas, toilet. We could achieve a level of saturation — reaching out everyone — in most of these services. The poverty focus of the government must continue.
We will become good welfare state if the government provides adequate cash and kind support for the poorest of the poor for survival, conditional cash and skilling support for the economically poor to raise their incomes to adequate levels and make functional arrangements for providing unemployment allowance to vulnerable poor during disasters like present one.
We conducted an Economic and Caste Census in 2011. It is time to conduct another Household Economic Census and assess the poverty status of all our households. This census should form the basis of our welfare state.