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Cash-Strapped States Send SOS to Centre

April 06, 2020 07:24 AM


Cash-Strapped States Send SOS to Centre
Seek compensation for a slump in GST mopup, flexibility to borrow more from the markets

New Delhi:

States have urgently petitioned the Centre seeking compensation for a slump in goods and services tax (GST) collections as well as the flexibility to borrow more from the markets as they seek to cope with the Covid-19 outbreak.

Punjab has sought the release of ₹6,000 crore toward GST compensation and immediate release of about ₹2,000 crore pending GST arrears. Rajasthan said the central government owes it ₹11,000 crore until February.

Bihar deputy chief minister Sushil Modi, however, said that some states were playing politics on the issue of dues.

“It is not that the Centre has money and is not giving it,” Modi said, adding that GST revenues have been sluggish due to the economic slowdown.

He said Bihar had announced an additional one month’s salary for frontline workers and will not cut pay. Modi said Bihar has also suggested legal changes to the framework governing funds such as the district mineral fund to allow the state to use it to provide assistance to non-registered workers.

“We can’t print money... we can only borrow,” said Punjab FM Manpreet Badal, adding that every state is in the same boat. Some states have deferred salaries while cutting other spending.

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States Want Fiscal Deficit Limit Eased

Independent experts reckon states face an additional spending bill of about ₹1.6 lakh crore to counter impact of Covid-19 that could severely strain their finances.

“Even if we take the 2018-19 GSDP (gross state domestic product) data and assume that states spend 1% of this GSDP extra, it will be an additional expenditure of ₹1.6 lakh crore,” SBI chief economist Soumya Kanti Ghosh said in a note. “It will be… foolhardy to practice fiscal austerity as of now. Covid-19 is making us take a hard look at the way we have shaped this world.”

Under the Fiscal Responsibility and Budget Management (FRBM) Act, states are allowed a fiscal deficit of up to 3% of GSDP. The states want the limit to be eased. Kerala finance minister Thomas Isaac wants relaxation by 1-4 percentage points. An easing of one percentage point relaxation can release roughly ₹1.6 lakh crore to the states.

“States need some relief,” Rajasthan deputy chief minister Sachin Pilot said. “They have to incur additional expenditure on health and providing ration.”

For FY21, the states had been expecting growth of around 17% in tax collections, but given the tough economic conditions, it could be in single digits. Most states witnessed a contraction in tax collections in March. With the lockdown scheduled to end on April 14, the damage will extend into the current year as India seeks to counter the pandemic, ensure that everyone’s healthy and revive the economy. “At 5-10% GST growth, the shortfall in GST could be as much as ₹75,000 crore,” Ghosh said. “That needs to be compensated by the Centre... States have already committed an extra expenditure of ₹30,000 crore.”

State government officials say the lockdown has dried up revenue sources under their domain such as fuel, liquor, stamp duty and road passenger revenues. The lower collection of central taxes means they will get less by way of devolution as well.

Telangana has deferred the salaries of government staff. Maharashtra, the state with the most Covid-19 cases, will pay salaries of its employees in two instalments. Other states are weighing their options.

The Punjab government will soon take a call on expenditure management. “I will present the worst-case scenario before the cabinet,” said Badal. Punjab has asked the Centre to release the ₹6,000 crore arrears to help the state pay salaries and service debt, he said.

“States’ own revenues have come down... Centre has direct tax revenues,” Isaac said. “It should give to states what is owed to them as per the law... Centre can borrow and give funds to states

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