COVID Crisis: Can Modi-Led Centre Not Do More to Bail Out States?

Some generosity from the Centre in the form of relief package to states would have helped and given confidence.

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Maharashtra has many advantages. Having Mumbai and other bustling cities like Pune, Aurangabad, Nashik and Nagpur has certainly been one of them. The state has many industrial corridors which are considered backbone of India’s economy. It raises nearly 70 percent of all its revenues from within which is one of the highest in the country.

These are some of the many pluses of Maharashtra, that would have helped the state fight any other calamity from a position of relative strength.

Ironically, in the midst of the corona pandemic and the extended lockdown, Maharashtra’s strengths have become its handicap. Many of the state’s densely populated business hubs have become COVID-19 hotspots, important industrial corridors have now been shut for two months, hitting the state harder than others, tax revenue has plummeted, and the pandemic does not seem to be anywhere close to being contained either.

Maharashtra Staring at Crippled Economy & Unabated Corona Fury

Maharashtra is not the only state that is struggling on all fronts. Despite nearly two months of total lockdown, the state is nowhere close to, what is known as, flattening the curve. The Chinese city of Wuhan, the original epicentre of COVID-19, had 76 days of total lockdown, and the city reportedly stamped out all traces of virus. By the end of Lockdown 4.0, India would complete 68 days of shutdown. Are we anywhere close to the so-called Wuhan containment model?

But the closure of most of the economic activities has done immense damage to Maharashtra’s economy.

One of the country’s most developed states is reported to have suffered a loss of revenue to the tune of Rs 41,000 crore in March and April alone. This is close to 18 percent of the state’s total annual receipts. With losses expected in May too, the state is likely staring at nearly a fourth, if not more, of its revenue lost to the lockdown.

According to India ratings, 21 major states, including Maharashtra, collectively lost nearly Rs 97,000 crore in tax revenue in April alone. With only partial relaxation in May, states may face similar losses in the current month too.

New Crisil research reveals that even after partial relaxation from Lockdown 3.0 onwards, “Maharashtra, Tamil Nadu and Gujarat, being most dependent on output from industry and services, are more vulnerable to output losses as they face restrictions. Andhra Pradesh, Rajasthan and Uttar Pradesh are fiscally more vulnerable due to relatively higher debt ratios. These states also have high dependence on revenue sources from petroleum, liquor and stamp duty. Andhra Pradesh, West Bengal and Tamil Nadu have higher share of informal workforce, which is vulnerable to job losses.”

Most Sources of Revenue of States Have Dried Up

The research indicates that while economies of all states are going to suffer because of the extended lockdown, the impact on some is going to be more severe than on others.

Of the major sources of states’ revenue- stamp duty, taxes on petroleum products, state GST and duty on alcohol being the prominent ones – all but some from liquor sales have dried up.

No wonder, Congress leader and commentator Praveen Chakravarty opines that there is a triple blow for the states as they are “not being paid what they are owed, not being helped with additional resources, and bearing the brunt of the pandemic’s impact. Not only are they not paid what is rightfully due to them, they have also lost the powers to raise their own sales tax revenues. So, how are they supposed to fight this health calamity with no money?”

States Need Resources Now More Than Ever Before

Now that the focus has shifted to resuming economic activities, and rightly so perhaps – the reopening of the aviation sector is one of the many indications to that effect –states need money and other resources quickly.

With the partial resumption of inter-state and intra-state movement of people, there is bound to be heightened risk of infection travelling to hitherto untouched areas. States and local administration, therefore, will have to be alert to new exigencies. Is that at all possible if states are struggling with the meagre resources they have?

With two months of uninterrupted and tiring work being done by an army of brave corona warriors – health officials and law enforcement personnel being the prominent ones – they need reinforcements now, and possibly some fresh legs too.

That will entail investing in training to have a new set of corona warriors. Are the states ready for this challenge?

Restarting Economy Is the Only Solution for States

The only hope for the states now is the Centre’s decision to raise their borrowing limits. Instead of the earlier cap of 3 percent of the respective state’s GDP, they have been allowed to borrow up to 3.5 percent automatically and up to 5 percent, if certain conditions are met. However, since the combined borrowing of the Centre, states and public sector undertakings is going to be significantly higher this year compared to what was the case earlier, interest rates have begun to inch up.

Extra borrowing, therefore, will be risky for states as the interest burden is going to be significantly higher. The full resumption of economic activities is the only hope for states now. Once tax collections reach the pre-COVID level, states will have the financial muscle, and therefore, necessary firepower in terms of relatively well-funded health infrastructure to fight the pandemic effectively.

The resumption of most of the activities, however, comes with some risk of the pandemic going out of control. Despite fast depleting resources, state governments will have to do most of the heavy lifting themselves.

Some generosity from the Centre in the form of a relief package to states would have helped and given us confidence. The federal government, however, does not seem to be in the mood to play Santa. Isn’t that disappointing?

(Mayank Mishra is a senior journalist who writes on Indian economy and politics, and their intersection. He tweets at @Mayankprem. This is an opinion piece and the views expressed in this article are that of the writer’s own. The Quint neither endorses nor is responsible for the same.)