GS Paper: GS3

The article elaborates on the central role played by the States in the fight against Covid-19. The article emphasises the role that States can play in the implementation of the various measures to tackle the epidemic and economic revival of the country. It also highlights the lack of resources at the States’ disposal and reasons for the lack such as revenue loss in the lockdown and lower devolution by the Central Government. In the end, there is a suggestion to increase the borrowing limit of the States’.

Time to relax fiscal constraints on the States

• The speed of economic revival will depend on how long it will take to revive economic activities and the volume of stimulus through public spending the government is able to provide.
• It now appears that the lockdown will be lifted in stages and the recovery process will be prolonged.
• The country is literally placed in financing a war-like situation.
• The government will have to postpone the fiscal consolidation process for the present, loosen its purse strings and finance its deficits substantially through monetisation.
• This is also the time for the government to announce relaxation in the States’ fiscal deficit limit to make them effective participants in the struggle.

The following points highlight the importance of States in dealing with the crisis. The federal structure of India comes to the fore here. The UPSC can aks question on this theme, for example, “Discuss the important role played by the States in dealing with the Covid-19 and how it underscores the federal character of the Indian polity?”

The important role played by the States

• Prioritise health spending: It is also important for the States to realise the importance of health and prioritise spending on health-care services.
• Being closer to the people, the States have a much larger responsibility in fighting this war.
• Public health, as well as public order, are State subjects in the Constitution.
• Acts invoked for lockdown: Some States were proactive in dealing with the COVID-19 outbreak by involving the Epidemic Diseases Act, 1897, even before the Government of India declared a universal lockdown invoking the Disaster Management Act, 2005.
• Of course, the Centre under Entry 29 of the Concurrent List has the powers to set the rules of implementation which states, “Prevention of the extension from one State to another of infectious or contagious diseases or pests affecting men, animals or plants”.
• Implementation at the ground level: While Central intervention was done to enable, “consistency in the application and implementation of various measures across the country”, the actual implementation on the ground level will have to be done at the State level.
• Furthermore, States are better informed to decide the areas and activities where relaxations should be done as the coronavirus curve is flattened.
• Coordination: Hopefully, there will be better coordination between the Union and State governments instead of claiming credit and apportioning blame.

Covid-19 has made clear the neglect and poor state of health in India. The UPSC can frame the question based on the health infrastructure and expenditure on it. The question can be framed on the following lines “Covid-19 has highlighted India’s lack of preparedness and the poor health infrastructure in the country. What are the reasons for it? Give suggestions to improve it.”

Neglect of the health-care sector in the country

• The pandemic has underlined the historical neglect of the health-care sector in the country.
• Expenditure on health as a percentage of GDP: The total public expenditures of Centre and States works out to a mere 3% of GDP.
• In 2017-18, in per capita terms, the public expenditure on medical and public health varied from an abysmal ₹690 in Bihar and ₹814 in Uttar Pradesh to the highest of ₹2,092 in Kerala.
• The centrally sponsored scheme, the National Health Mission, is inadequately funded, micromanaged with grants given under more than 2,000 heads and poorly targeted.
• The focus of “Ayushman Bharat” has been to advocate insurance rather than building wellness centres.

Economic revival by the States

• Besides protecting lives and livelihoods, States will have to initiate and facilitate economic revival, and that too would require substantial additional spending.
• Hand holding small and medium enterprises which have completely ceased production, providing relief to farmers who have lost their perishable crops and preparing them for sowing in the kharif season are other tasks that require spending.
• In fact, States have been proactive. Kerala came out with a comprehensive package allocating ₹20,000 crores to fight the pandemic.
• Almost all States have taken measures to provide food to the needy besides ramping up health-care requirements.

Lack of resources and revenue loss suffered by the States

• While the requirement of States for immediate expenditures is large, they are severely crippled in their resources.
• In the lockdown period, there has virtually been no economic activity and they have not been able to generate any revenue from State excise duty, stamp duties and registration fees, motor vehicles tax or sales tax on high-speed diesel and motor spirit.
• The revenue from Goods and Services Tax is stagnant and compensation on time for the loss of revenue has not been forthcoming.
• As the recovery process will be staggered, it is doubtful whether tax revenues will register any positive growth in 2020-21.
• Not surprisingly, the State has decided to monetise land through auctions to get money besides regularising unauthorised constructions by paying high fees.

Lower tax devolution from the Centre

• The position regarding tax devolution from the Centre is even more precarious.
• To begin with, the tax devolution in the Union Budget estimate is lower than the Commission’s estimate by ₹70,995 crores.
• In fact, the Budget estimate for 2020-21 itself is a huge overestimate when seen against the 11-month actual collections in 2019-20.
• The required growth to achieve the Budget estimate is 33.3% over the annualised actual collection.
• The projections are that the growth of nominal GDP in 2020-21 will be just about 4%.
• And if the tax revenue increases by the same rate, devolution to the States would be lower by ₹2.2-lakh crore than the Finance Commission’s estimate.
• This results in a loss of ₹9,173 crores for Tamil Nadu, ₹9,000 crores for Andhra Pradesh, ₹8,000 crores for Karnataka, ₹4,671 crores for Telangana, and ₹4,255 crores for Kerala.
• Supplementary report by the Finance Commission: There is a strong case for the States to go back to the Finance Commission with a request to make and give a supplementary report.

Of late, the poor fiscal health of the States has been in the news. Following are some of the factors that are responsible for it. A question can be asked with relation to this problem like “The States are facing fiscal constraints owing to the lack of revenue. What are the reasons for it? What are the options available to help the States to deal with such a situation?”

Problems faced by the States in raising resources

• There is only a limited scope for expenditure switching and reprioritisation now.
• Limited space for borrowing: Their borrowing space too is limited by the fiscal responsibility and budget management limit of 3% of Gross State Domestic Product (GSDP).
• High yield no the State bonds: Faced with an acute fund crunch, Kerala floated 15-year bonds but was faced with a huge upsurge in the yield to 8.96%.
• Increase in the WMA limit: The announcement by the Reserve Bank of India on the increase in the limit of ways and means advances by 60% of the levels prescribed in March 31 could help States to plan their borrowing better.
• But that is too little to provide much relief.

Conclusion

It is important for the Central government to provide additional borrowing space by 2% of GSDP from the prevailing 3% of GSDP. This is the time to fiscally empower States to wage the COVID-19 war and trust them to spend on protecting lives, livelihoods and initiate an economic recovery.

The article discusses three fronts on which actions are required viz- health, economy and geopolitics. How much the global economy is going to be affected? how the US-China rivalry would affect the recovery? what the lack of global coordination means? all such questioned are discussed here.  It also suggests actions that India should take to deal with the crisis.

Many unknowns than knowns about Covid-19

• The virus currently has many more unknowns than knowns.
• We don’t know for sure how it spreads, whether people can get re-infected, whether it is mutating, whether the hot weather kills it, and what the real fatality rate is.
• We don’t know for sure how far we are from an anti-viral.
• We know that we are at least 18 months away from having a vaccine that works and is available at scale.
• Till an anti-viral is found, economic activity will be constrained, and this will affect people, industries and countries in disparate ways.

The extent of damage to the global economy

• Loss of ten trillion dollars: The global economy is set to lose close to ten trillion dollars because of the “self-induced coma” it has been put into — to use Paul Krugman’s evocative phrase.
• Loss of effectiveness of monetary policy: The preceding global financial crisis (GFC) has exhausted the efficacy of monetary tools.
• In addition, corporates globally are leveraged to the tune of $12 trillion.
• The slump in demand: The accompanying oil price collapse, beginning due to a spat between producers Saudi Arabia and Russia have been compounded by a precipitous slump in demand.
• The Chinese economy can’t help as it did during the GFC, as it is hemmed in itself.
• Even if it could, there is too much global suspicion of China to allow it to do so. So, countries will largely be on their own.

Tensions between the US and China

• The tensions between the US and China have escalated into a full-scale superpower crisis after the virus spread.
• Since 2010, there has been great concern in the US about China’s rise.
• China’s muscular foreign policy together with its aggressive stance on multiple issues, most importantly on technology and technology standards, has created conflict.
• The coronavirus is spreading in the US in an election year and smashing its economy.
• The virus infected over three-quarter of a million people in the country and killed more than 40,000.
• After this, China could be seen as enemy number one in the US.

No global coordination

• No wonder then that at a time when the world yearns for global coordination, there is almost none — in healthcare responses and economic coordination.
• Multilateral agencies, especially the WHO and UN, suffer a complete loss of credibility.
• India needs to chart its own course in these turbulent times.
• If India takes the requisite actions it may come out well.

Following suggestions are important from the UPSC perspective. The suggestions deals with three fronts-health, economic and geopolitics.

How India could come out of the crisis?

• India needs to act at three levels — health, economic and geopolitical.

1. Actions at the health level

• The Union Ministry of Health and Family Welfare has done well to stem the spread of the infection.
• It has sensitised the public, introduced the concept of social distancing and isolation in the most challenging situations.
• Now it must test at scale and isolate.

2. Actions at the economic level

• Indians cannot afford to stay locked much longer.
• We are too poor and too many of us live on a day-to-day basis — not even on a paycheck to paycheck basis.
• Economic activity will be subdued in the near-term, but it must be “unlocked”.
• The current IMF projections suggest that India will have the highest growth rate in the world this year.
• Oil prices have collapsed, really helping our balance of payments.
• Our food stocks are plentiful, the rabi crop has been good, and the prognosis for the monsoon is positive.
• Low inflationary pressure: This, together with the fact that aggregate demand is down, will dampen inflationary impulses.
• The “new RBI” has acted boldly and strongly.
• It has taken prompt actions to reduce rates, increase liquidity, adjust prudential norms, allow moratoriums, and protect financial entities.
• Indian is better placed: The weakened rupee will help our exports and with a debt to GDP ratio of about 73 per cent, along with better growth prospects, India is relatively better placed than several other countries.
• We should, therefore, not unduly worry about our credit rating. This both allows and actually requires the government to act on the fiscal front.
• The government needs to implement the following four steps to spur the economy.
• (1) It should do so by “printing money” given the moderated inflation
• (2) It needs to provide additional direct benefit transfers of Rs 2,000 every month for three months to Jan Dhan accounts, together with foodgrains release from the FCI, to the tune of around Rs 65,000 crore, to alleviate people’s miseries.
• (3) It needs to protect MSMEs directly by providing them working capital (with an RBI backstop) and, like in the UK, provide 80 per cent of the salary to employees of the “GST-paying MSMEs” for six months.
• (4) It needs to launch a massive public works programme outside the Budget as suggested by the chairman of CII’s National Committee of Infrastructure and PPP, Vinayak Chatterjee.
• This fund should be earmarked for infrastructure and a quarter of its budget should be set aside for strengthening and upgrading primary health centres.
• The allocation should not be less than Rs 200,000 crore.
• Push through pending reforms: The government should take advantage of the crisis to push through much needed pending reforms in agriculture-especially those pertaining to APMC), power-pricing and discoms, banks-government ownership at 30 per cent and bad banks.
• Revenue from private gold: Given the paucity of tax revenues, the government could also consider having the PM making an appeal for private gold from people and temples.
• It could target 1,000 tonnes of gold worth $30 billion and offer a five per cent tax-free return repayable ($1.5 billion a year) after 10 years, in rupees or gold.

3. Actions at the geopolitical level

• India can come out ahead if we act now.
• Super-power rivalries will create opportunities to replace China as a major supplier to the US and Japan.

Conclusion

The battle to deal with the corona disaster has to be fought on many fronts. India must form a strategy and act on various front i.e. health, economic and geopolitical- to be victorious at the end.