Coronavirus – Economic Issues

Fiscal empowerment of States


From UPSC perspective, the following things are important :

Prelims level : Ways and means advances, limit on the states for borrowing.

Mains level : Paper 3- Discuss the ways to ensure that the States do not face lack of resource in fight against Covid-19?

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.


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.

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