In recent years, the country appears to be subjected to a series of shocks. The first in line was demonetisation, second was a poorly conceived, badly designed and weakly implemented GST and the third in line is the current pandemic. The pandemic was of course not a man made one, at least not made in India. However, it did not emerge suddenly. It started appearing in different parts of the world much earlier. But the package to prevent this pandemic came all of a sudden with just a three hour notice for the country to standstill. Obviously, we could not have expected the Prime Minister to go into the details, but one would have expected him to hand over the mike to the Finance Minister and she would have given the details. But what happened was that, she in turn appointed a committee which in turn appointed sub committees and then the package of measures were conveyed to the states. The process took enormous time which especially the poor people in the country could ill-afford. More importantly, the mitigation measures, which finally came out, were actually are packaging and amalgamation of already existing schemes with very little additions.
The central government has two instruments of policy in its hands. One is the monetary policy to be implemented by the Reserve Bank of India (RBI). During this crisis, the RBI policy came in bits and pieces and the measures announced were more in the form of palliative care rather than any substantial intervention. What they did was only to reduce the interest rates. The major initiative should have come in the fiscal policy. In fiscal policy, there has been a sort of the golden rule of three percent of the GDP as a limit to the fiscal deficit. There is nothing sacrosanct about this three percent. In times of emergencies, the central government had relaxed this three percent norm on its own. Even this year, it appears that the central government has already exceeded the fiscal deficit target of four percent. As I had argued elsewhere earlier, actually there is a case for sharing these excessive borrowings of the central government among the states as the ill-effects of the larger fiscal deficit in terms of inflation is to be borne by the state governments also. But that never happened in India. So nothing more could have been expected.
The central government has got a big bonanza in the form of the steep decline in the oil prices which is running around $20 per barrel now. This windfall profit of the public sector refineries and oil companies could have been shared among the state governments.
The states had been forced to restrict their fiscal deficit to three percent, which did not get relaxed even in view of this emergency situations. Of late, there has been some relief in the case of disaster relief fund. But the distribution of this fund, as it turned out has been very uneven and discriminatory towards the badly affected states like Kerala (due to its strong connection with Gulf countries).
As I had extensively discussed earlier, there has always been a divergence between the fiscal powers of the state government and its responsibilities. Till recently, the only buoyant source of revenue for the state was the state sales tax. With the introduction of the GST and the abolition of the sales tax except for a few commodities, there are few buoyant revenue resources available for the state governments. Now, the state governments are left only with the stamp duty, VAT on the sale of beverages and surplus from the same and (which is a state monopoly)and revenue from the sale of lotteries. All these sources have dried up in the view of total prohibition and the temporary ban of the lottery sales imposed now. The stamp duty also has come down as there is no land transaction taking place because of the total collapses of the land market.
Coming to the expenditure responsibilities, the major burden of providing food and health care to the citizens in general and the poor in particular is on the state for which they do not have adequate resources -both physical and monetary. After the global break out of the current pandemic, the government of Kerala has been doing pretty well in providing minimum food and other provisions for the poor. But then, how long it can sustain it because ofthe state’s poor fiscal resource situation is a big question to be answered.
In addition, Kerala is facing another problem, which has not been recognised by the central government yet. We have a large volume of migrant labourers who are unable to go back to the native places and the state has to provide for them. But in the food quota, which is made available to the state, this dimension has not been considered.
Professor K.K.George Chairman, Centre for Socio-economic & Environmental Studies is an expert on Public Finance and Centre-State relations.
