SBI Research Wants Centre To Rescue ‘Fragile’ State Finances

India’s central government should step in and compensate states that are having to spend more to tackle the Covid-19 outbreak while simultaneously earning lower revenue due to declining economic activity.

That’s according to SBI Research that wants the centre to rescue state finances in 2020-21 as part of a larger package to manage disruption from the new coronavirus pandemic. “It would be complete foolhardy to practice fiscal austerity as of now,” SBI Research said in its publication Ecowrap. “We earnestly appeal to the Centre now to spend and not give misguided fiscal prudence, = as India can only escape from the current crisis through overbearing fiscal policy.”

While India is yet to see a spurt in Covid-19 cases that would threaten to overburden its weak health infrastructure, the possibility of community transmission looms large. Besides, a 21-day lockdown announced by the government has brought economic activity to a grinding halt.

India’s states have led the charge in trying to contain the spread of the virus by setting up isolation wards, procuring more medical equipment, ramping up testing facilities and ensuring the availability of essential services and goods during the lockdown. A number of states have also put in efforts in providing financial assistance to businesses and people, particularly daily wagers and migrant labourers.

These raft of measures cost money. And states had already presented their budgets in February, before the coronavirus threat. Which only means that the combined effect of a shortfall in tax collections along with higher expenditure towards the social sector will send the state's fiscal deficit in a tizzy, SBI Research said.

The Fiscal Match

SBI Research said the combined fiscal deficit for 19 states is at 2.56 percent of gross state domestic product for 2019-20. While that is lower than the 3 percent target set by the Fiscal Responsibility and Budget Management Act, it is higher than the budgeted estimate of 2.06 percent.

The higher fiscal deficit for states was mainly due to the reduced share of central taxes by almost Rs 1.26 lakh crore in 2019-20. The states' own tax collections have only grown 1.6 percent over 2018-19. Only sharp capital expenditure cuts helped states in maintaining the deficit.

The fiscal deficit projection for these states for 2020-21 is 2.04 percent. That, SBI Research said, is unachievable as they grapple with the slowdown while increasing spends.

SBI Research estimates that if GST collections grow at 5-10 percent, as opposed to the budgeted 17 percent in FY21, then there would be a shortfall of Rs 75,000 crore. That needs to be compensated by the centre.

The report also that the estimated health expenditure is not cross 2 percent of the GSDP for any of these 19 states. It said that the states will have to increase spending on health, supported by the central government.

“Even if we take the 2018-19 GSDP data and assume that states spend 1 percent of this GSDP extra, it will be an additional expenditure of Rs 1.6 lakh crore,” the report said

SBI Research said the Covid-19 outbreak is giving governments a reality check on spending priorities. “Low spending on health and education and other social sectors is biting now and we have to take a hard look going forward as to what our priorities should be.”

It said that the Centre should support states “wholeheartedly” in the fight to curb the virus spread and mitigating its economic impact.

“Fiscal austerity cannot tide us through times like this and states and centre should do as much as they can to protect the poor who will be hit the hardest, as they have no means of survival.”