Fiscal friction

Central govt should not leave everything to states

The number of new Covid-19 cases continues to rise at an alarming rate and is putting enormous pressure on medical infrastructure in various parts of the country. A number of states have imposed restrictions on public mobility to contain the spread of the virus. Delhi, for instance, is under lockdown for a week. Rising cases, along with restrictions on mobility, are affecting economic activity. It is likely that restrictions and the fear of infection will not abate in a hurry. However, despite this rapidly worsening environment, the Central government is reportedly unwilling to extend fiscal support. The thinking seems to be that the economic impact of the second wave of Covid-19 will be much less than the first phase, which led to nationwide lockdown. And in any case, it’s now for the states to support businesses and citizens. In fact, Maharashtra has announced the distribution of free extra food grains.

 
It is quite likely that the impact will not be as severe as last year. However, it is worth recognising that both businesses and citizens have been subjected to a second shock even before most could recover from the first blow. It is also reasonable to argue that fiscal stimulus in terms of increasing government expenditure at this stage will not work because of restrictions on mobility. But this should not stop the Central government from extending relief to the most vulnerable sections as it did last year. Leaving everything to states would be both insensitive and short-sighted. It can also be termed selective use of fiscal federalism. States are at the forefront in fighting the pandemic and will need resources. Their own revenue would again be under pressure because of lower economic activity. However, their ability to borrow is restricted and states are expected to follow a steeper fiscal consolidation path.

 
States will now also need funds to procure vaccines. The Union government has opened up the vaccination programme. Accordingly, 50 per cent of supply will be available for state governments and the private sector. The Central government will lift 50 per cent of vaccines for its ongoing vaccination programme. In this context, it will be important for the Union government to clearly outline the supply pipeline and how it will be distributed among states. This will allow states to make procurement plans. Serum Institute of India has priced its vaccine at Rs 400 per dose for state governments and Rs 600 for the private sector. This could lead to a significant outflow for states, which have started complaining about how the unilateral decision would add a heavy burden on their finances already reeling under the stress of the pandemic.

 

Thus, support from the Central government would be important. There is no reason why the Union government cannot restart the distribution of free food grains to the most vulnerable sections. A lot of effort has gone into building the “one nation, one ration card” system. Availability of food might also prompt migrant labourers to stay back, which will reduce the risk of infection. The government could also contemplate extending credit lines to small and medium businesses like last year. The Reserve Bank of India provided significant support in 2020 but would not be able to repeat the same because of inflation concerns. Thus, the government would have to do more this time around. Besides, the Union government should work with states and support them in every possible way to augment medical infrastructure. To be sure, all this will increase cost for the Central government. But increasing infection and a delay in economic recovery would be more damaging.