The Covid-19 slowdown: Next focus for Centre should be the states

The combined fiscal deficit projection for FY21 at 2.04% for 19 of the biggest states is now unachievable as they grapple with the slowdown due to Covid-19, all the while stepping up spending

The world’s second-fastest growing major economy has come to a near halt as the three-week lockdown continues. While the government has said that as of now there are no plans to extend the nationwide lockdown beyond April 15, a decision will clearly be taken based on how much the number of confirmed cases escalate over the coming days.

Some factories have closed, others have pivoted to making medical supplies. Markets are mostly shut, with only some of them selling essential items. Even for those essential items, like rice, wheat, pulses, vegetables, soaps, and others, the supply chain has been disrupted.

Economists across the board have slashed their estimates for January-March 2019-20 and April-June 2020-21 quarters. Even Niti Aayog vice-chairman Rajiv Kumar has said that the April-June quarter growth could be zero or in negative territory.

Last week, Finance Minister Nirmala Sitharaman announced a food security and income transfer package for the urban and rural poor. The package includes free foodgrain for 800 million people for three months, insurance cover for essential service providers, front loading of PM Kisan installments, and increase in wages under the employment guarantee programme.

While Sitharaman and the government claimed that it was a Rs 1.07 trillion package, a quick analysis of the announcements revealed that the actual size of additional outlay due to the announcements comes up to be a little less than Rs 1.03 trillion.

Just a day later, the Reserve Bank of India (RBI) came out all guns blazing to arrest a potential slowdown caused by coronavirus (Covid-19), lowering the policy repo rate by 75 basis points to 4.4 per cent, and telling all banks and housing finance companies not to take instalments on term loans for three months.

Earlier, Sitharaman had also announced another set of regulatory and compliance relief measures across sectors. She had said that the threshold for default under the Insolvency and Bankruptcy Code was increased to Rs 1 crore from Rs 1 lakh, to prevent triggering of bankruptcy proceedings for micro, small and medium enterprises, removed charges for three months for debit card holders withdrawing cash from ATMs of other banks, waived off the minimum balance fees, and extended the date for most direct tax and goods and service tax filings to June 30.

More needs to be done though, and while senior sources in the government are loathe to give out details, they say a number of other measures are still in place.

Depending on how much worse the slowdown becomes, the Finance Ministry is learnt to be working on another package for medium, small and micro enterprises, as well as for the agriculture sector. The latter, especially, is been seen as a concern for the government, as farmers are still finding it difficult to get their produce transported to markets due to the shutdown.

Another point here is that there is only so much the centre can do. While the Chief Ministers of the states affected by Covid-19 have taken many relief measures, more will need to be done regarding their respective economic activity as well. There is concern, however, regarding their finances.

"Indian states have presented their respective budgets beginning February oblivious to the looming threat the coronavirus posed to the entire world, including India. However, the novel coronavirus has thrown everyone in a tizzy. The recent state budgets numbers will undergo massive revisions owing to these circumstances. The Governments will have to step up expenditure, especially in the social sectors like health and sanitation, with a shortfall in tax collections. This will push state fiscal deficit above 3 per cent in the coming year,” said Soumya Kanti Ghosh, Chief Economic Advisor at State Bank of India, in a report on Tuesday.

The states have been asking for a relaxation for their borrowing and fiscal limits. During a media briefing on the centre’s borrowing plans on Tuesday, Economic Affairs Secretary Atanu Chakraborty said that the centre is considering these proposals by states.

Ghosh said that the combined fiscal deficit projection for FY21 at 2.04 per cent for 19 of the biggest states was now unachievable as they grapple with the slowdown due to the Covid-19, all the while stepping up spending.

“At 5-10 per cent GST growth, the shortfall in GST could be as much as Rs 75,000 crores, that needs to be compensated by the Centre. And the states have already committed an extra expenditure of Rs 30,000 crores,” he said, adding that the estimated health expenditure as percentage of estimated GSDP in FY21, was not crossing even 2 per cent for most of the states.

“It will be complete 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. 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,” Ghosh said.

“The Centre must also support the States wholeheartedly in such an endeavor. 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,” he added.