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Coronavirus lockdown and the state of State finances

The nationwide lockdown to prevent the spread of COVID-19 has left the finances of the State governments in a precarious position. The Centre has its own problems of revenue and rising demand on expenditure but at least it is its own master. Not so in the case of States, which have to depend on the Centre for devolution of funds under various heads. This dependency has become especially acute after the advent of GST wherein the Centre has to compensate for loss of revenues for five years ending 2022.

Revenues from own taxes account for just under half (45%) of the total revenues of the States, according to a Reserve Bank of India study of state finances; central transfers account for 47.5%. Of the own tax revenues, 90% comes from taxes on liquor, petroleum products, stamp duty and registration of vehicles.

All of these are now under strain. There have been no new vehicle and property registrations since the lockdown began and also no sale of liquor. Petroleum sales have dropped by about half as commercial activity is at a standstill and vehicles and planes idle. As a result, own tax revenues of the States have plunged by 80-90%, leaving their finances in the lurch.

Meanwhile, they have been called upon to spend more to ease the burden on the poor with direct cash transfers to the needy and on beefing up health infrastructure, apart from the expenses on testing, quarantining and treating of patients.

Entreaties from States to the Centre to hasten the transfer of GST compensation, increase fiscal deficit limits from 3% to 4.5-5% and for higher ways and means advances (WMA) limits have all fallen on deaf ears till now. The RBI did increase the WMA limit as part of its relief package but that is not adequate.

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