Alcohol Fight Shows India’s States Battling Modi for Virus Billions
A worker moves cases of United Spirits Ltd.’s Kingfisher beer at a liquor store in New Delhi, India. (Photographer: Prashanth Vishwanathan/Bloomberg)

Alcohol Fight Shows India’s States Battling Modi for Virus Billions

(Bloomberg) --

In the tug-of-war between India’s states and Prime Minister Narendra Modi’s federal government for cash to fight the coronavirus outbreak, liquor has become the latest battleground.

A well-known teetotaler, Modi banned alcohol sales during the country’s national lockdown to contain the virus, blocking a crucial source of direct tax income for states already struggling to ramp up health infrastructure and provide food to millions left jobless. The loss of liquor tax revenues -- an estimated 7 billion rupees ($92 million) a day -- has prompted calls from states like Punjab to lift the ban.

“Liquor is a major source of revenue for all states,” Amarinder Singh, Punjab’s chief minister from the federal opposition Congress party, said in a television interview last week. “How will I make up for that? Will the people in Delhi give it to me? They don’t even give 1 rupee.”

The fight over alcohol is among a series of recent moves in which the federal government has eroded the ability of states to raise the cash needed to handle the coronavirus, which has now led to 29,451 infections and 939 deaths across the country. India’s constitution gives states the responsibility of delivering health care and ramping up its often decrepit hospital system to cope with a surge in demand.

Modi, a former chief minister of the state of Gujarat, had long championed the idea of “cooperative federalism” and in his first term worked with states to roll out a nationwide sales tax. But his second term has seen greater conflict with state governments, particularly those led by opposition parties who have resisted his Hindu nationalist party’s backing of moves that discriminate against the Muslim minority.

“It is the local governments that are fighting on the ground,” said Thomas Isaac, finance minister of the southern state of Kerala, which has yet to receive its share of April taxes. “All funds have dried up. And there’s no way to really raise funds.”

States Hobbled

Apart from taxes on alcohol, the other sources of state governments’ revenue -- duties on fuel and real estate transactions -- have also dried up with the economy in shutdown mode. India’s tax shortfall could be as high as 2.9 trillion rupees this fiscal year, said M Govinda Rao, economist and former government adviser.

State leaders have also criticized plans to centralize the purchase of coronavirus medical and protective kits, as well as a special virus relief fund that falls outside the remit of the federal auditor. The Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund, or PMCARES, raised 65 billion rupees ($848 million) in its first week, according to a report in The Print.

“What’s happening is not in the spirit of cooperative federalism,” Isaac said. “There’s no clarity on how the funds collected will be used.”

The prime minister’s office didn’t respond to an email seeking comments on how the fund would be utilized or audited. In announcing the creation of the fund, Modi said it was in response to requests from people to donate and said it would “strengthen disaster management capacities and encourage research on protecting citizens.”

The new fund includes attractive benefits not legally available to relief funds run by chief ministers: overseas contributions are allowed and large companies’ donations can count as part of the mandatory requirement to spend 2% of annual profit on public causes. Russia’s state-owned defense exports company Rosoboronexport committed $2 million to the fund, which is managed by a trust with federal ministers of home affairs, finance and defense as its members, The Hindu reported.

India’s Reliance Industries Ltd. contributed $66 million to PMCARES and $65,626 each to the states of Gujarat and Maharashtra. Groups including Vedanta, Aditya Birla and Adani announced contributions of more than $13 million to the federal fund.

The companies didn’t immediately respond to emails seeking comment.

Modi has positioned himself as the decision maker in this crisis and is using it as an opportunity to strengthen his hand, said Rahul Verma, a researcher at the Delhi-based Centre for Policy Research who has written a book about ideology in Indian politics.

“His federal government is emerging stronger than before while states seem weaker,” Verma said. “But his future will depend on how the crisis unfolds in the future, how many deaths it causes and whether his decisions stand the test of time.”

Lockdown Criticisms

Modi drew criticism from some chief ministers for announcing a nationwide lockdown on television on March 24 with just four hours’ notice and without consulting state leaders. As work and wages dried up overnight, millions of migrant workers set off on foot from cities like Delhi and Mumbai for their homes hundreds of miles away.

The financial burden of this unprecedented migration, amid the already high costs of ramping up medical infrastructure, fell on unprepared states, which had to make arrangements to house and feed millions at a very short notice.

States are also facing delays in receiving their share of national sales tax. Punjab, home to 28 million people, says it’s received only $9.3 million -- or $3 per person -- in federal disaster funds to fight Covid-19 and is still waiting for its share of sales taxes to help run state government machinery and pay salaries.

State governments in Maharashtra, Rajasthan and Chhattisgarh have also expressed concern about the call to route purchases through the federal government given the delays by state-run HLL Lifecare Ltd. in ramping up supplies in time. According to the Modi administration, HLL was asked to ramp up production after it found it tough to import the needed PPEs.

While the states say they would back plans to centralize procurement of medical equipment if it helps cut costs, they also want to be able to buy protective equipment through the open market where available.

“Both states and the Modi government need to set aside politics at this point in time,” said Ravindra Waikar, the minister coordinating relief efforts in Maharashtra.

Hamstrung Lawmakers

Modi’s government has also pulled away discretionary funds available to members of Parliament to spend on their constituencies for the next two years, upsetting opposition legislators. The move, announced along with a one-third salary cut for all lawmakers, was made to manage the ‘adverse impact’ of Covid-19, Prakash Javadekar, minister for information and broadcasting, told reporters on April 6.

The total amount is relatively small -- 78.4 billion rupees, or roughly equal to half a week’s open market borrowings by his federal government. But it hobbles lawmakers’ ability to respond to both the virus and the economic troubles in their constituencies.

Shashi Tharoor, a federal lawmaker from the Congress party has asked the government to take back its order.

Still, voters so far aren’t blaming Modi for gaining greater control over the flow of money and medical supplies. Even amid an economic slowdown that’s expected to worsen during the 40-day lockdown that ends May 4, Modi topped a global opinion poll of world leaders that rated their handling of the coronavirus pandemic.

“At the end of this crisis, Modi will personally emerge stronger than he is. Even despite the strain of the push and pull with states,” said Abhay Pethe, an economist and former adviser to the Maharashtra state government. “No one can speak against him easily given the delicate situation. History has, at least for the moment, placed him in such a position.”

©2020 Bloomberg L.P.

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