Why fiscal prudence in a pandemic year? – The Hindu BusinessLine

Clipped from: https://www.thehindubusinessline.com/opinion/why-fiscal-prudence-in-a-pandemic-year/article34815104.ece

In 2020-21, rather than boost public spending, some States surprisingly chose to cut expenditure/subsides and the fiscal deficit

The real gross domestic product (GDP) at constant (2011-12) prices in 2020-21 is set to contract by 7.3 per cent due to the Covid-19 pandemic, according to the Ministry of Statistics and Programme Implementation. The possibility of double-digit recovery of GDP is most unlikely due to the ongoing second wave and the risk of a third wave.

However, due to the fall in economic activitiy, the Central and State governments have suffered massive revenue losses. The staggering positivity rates in the second wave may further strain their financial position. The continuous deceleration in output, income and revenue would create challenging situations for the governments.

The Central and State governments follow a rule-based fiscal policy regime that does not give much leeway, especially for the States. However, Finance Minister, Nirmala Sitharaman has relaxed the Fiscal Responsibility and Budget Management (FRBM) rules, allowing States to borrow up to five per cent of their GDP. Similarly, the Reserve Bank of India has made extra room for borrowings. So, how did the States manage their finances during the pandemic?

The monthly data from the Comptroller and Auditor General (CAG) is available for 18 States till March 2021. For better comparison, these States are classified into high-income (12) and low-income (6). States with higher per capita GSDP than the national average (₹1,08,620) are considered high-income. The 12 high-income States in descending order are: Sikkim, Haryana, Gujarat, Karnataka, Uttarakhand, Tamil Nadu, Telangana, Maharashtra, Kerala, Mizoram, Punjab, and Andhra Pradesh. The six low-income States, with less than the national average per capita GSDP, in descending order are: Tripura, Rajasthan, Odisha, Chhattisgarh, Madhya Pradesh and Uttar Pradesh.

Revenue loss

During 2020-21, most of the low-income States suffered revenue loss — Uttar Pradesh (-30.5 per cent), Rajasthan (-4.24), Madhya Pradesh (-2.18) and Chhattisgarh (-1) — except Tripura (17.2) and Odisha (5.50). Of the 12 high-income States, five witnessed a healthy growth in revenue receipts — Uttarakhand (23.2), Punjab (20.4), Sikkim (13.5), Kerala (9.3), and Andhra Pradesh (5.2). The remaining seven witnessed a contraction in revenues — Mizoram (-13.1), Gujarat (-11.7), Karnataka (-10.53), Maharashtra (-6.5), Tamil Nadu (-2.8), Haryana (-2.8) and Telangana (-2.6) .

Except Uttarakhand (-36.8), Haryana (-16), Mizoram (-9.3) and Punjab (-7.6), most of the high-income States saw an increase in capital receipts (mostly through borrowing) — Karnataka (89), Tamil Nadu (67), Telangana (52.5), Gujarat (48.9), Kerala (38), Maharashtra (24.6), Andhra Pradesh (18.3) and Sikkim (9.9).

Besides, the low-income States of Uttar Pradesh (110.8), Madhya Pradesh (53.7) and Rajasthan (14.9) that saw a slump in their revenue receipts increased their capital receipts. Whereas low-income States like Tripura (-114.7) and Odisha (-60.3), apart from registering a substantial hike in their revenue receipts, chose not to borrow and remain content with a reduction in capital receipts. Although Chhattisgarh suffered a loss in revenue receipts (-1) it went for a reduction in capital receipts (-14.3). High income States like Andhra Pradesh, Kerala and Sikkim preferred to increase their borrowings along with an increase in revenue receipts to augment their capital expenditure.

Slashing expenditure

Despite revenue contraction, States are supposed to keep the expenditure high to compensate for private investment and check any further deceleration in output. On the contrary, majority of the States chose to slash expenditure to remain fiscally prudent.

Mizoram (-11.2), Haryana (-6.7), Odisha (-6.5), Chhattisgarh (-3.8) and Uttar Pradesh (-1.4) recorded a fall in total expenditure compared to the last year. For unfathomable reasons, these States, except Uttar Pradesh, did not wish to borrow even though they had substantial fiscal space.

Despite a crippled and inadequate healthcare system, rich States like Haryana (-258.4), Maharashtra (-22.6), Mizoram (-17.9) and Telangana (-5.3) and poor ones like Uttar Pradesh (-14.2) and Odisha (-10.7) sharply slashed the capital expenditure. In times of a recession, cut in spending on social sectors is worrisome.

The pandemic has hit the informal economy and the poor and middle-class populations hard. However, States such as Chhattisgarh (-57), Andhra Pradesh (-30), Rajasthan (-22), Uttar Pradesh (-20.5) and Haryana (-6.8) have reduced the percentage of year-on-year subsidy payments. The situation is worse in Karnataka, Sikkim and Mizoram, where the subsidies were minuscule.

In these challenging times, a low-income State like Odisha and a high-income one like Uttarakhand preferred to maintain a huge revenue surplus of ₹11,350 and ₹1545.14 crore, respectively, in 2020-21.

In addition, Tripura, Odisha, Uttarakhand, Chhattisgarh, Mizoram and Punjab opted to reduce the fiscal deficit by 115, 63, 37, 13.5, 9.7 and 4.5 per cent, respectively, in 2020-21.

This is surprising indeed, as a pandemic year was chosen to adhere to fiscal discipline. Contrastingly, Uttar Pradesh (119), Karnataka (88.7), Tamil Nadu (74), Rajasthan (62.2), Madhya Pradesh (53.7), Telangana (52.6), Gujarat (49.7), Kerala (38.5), Maharashtra (25), Andhra Pradesh (24.8) and Sikkim (9.9) recorded a staggering year-on-year increase in fiscal deficit percentages. These States have preferred to borrow more to accommodate increased capital expenditure.

With the possibility of a second blow to the economy, the market may not invest enough to keep the economy afloat. In such a situation, State governments shouldn’t stick to fiscal discipline.

Instead, the priority should be to increase public spending to revive the economy, generate employment, and provide all possible safety nets.

Biplab is a PhD from IIT Kharagpur, and Amarendra is Reader-F (Economic) at NISER, Bhubaneswar

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