State finances are in a shambles. Every single State’s, without exception, though the degree may vary. The COVID-19-induced lockdown has dealt State finances a triple whammy. Their own revenue sources — mainly from liquor sales, stamp duty from property transactions and sales tax on petroleum products — that account for half their total revenues, have collapsed. And their expenditure such as on interest payments, social sector schemes and staff salaries remains unchanged. Worse, they are now called upon to spend more on beefing up their health infrastructure and on COVID-19 measures, including testing, treatment and quarantining. So, it is not surprising that all of them, including the gold standard ones such as Maharashtra, Tamil Nadu and Karnataka, are now pleading for funding support from the Centre and relaxation in borrowing rules by the RBI. And the Centre has been watching silently even as some States have gone ahead and cut salaries of their employees and pension benefits to rein in expenses.
It could be argued that by seeking consecutive extensions of the lockdown, which imposes tremendous strain on not just their finances but also that of the Centre, the States are wrong in their approach. Are they taking the easy option by seeking extensions and simultaneously demanding financial support from the Centre? Tamil Nadu, Karnataka and Maharashtra, in their desperation, commenced liquor sales with outlets flouting all physical distancing norms. The fear is that this could seed fresh infections. The Centre is itself not in a happy place financially. But it at least has the means to replenish its finances through conventional and unconventional means. For instance, it appropriated almost all of the benefit of falling oil prices through increase in duties — ₹13 a litre on petrol and ₹16 a litre on diesel — in two tranches in March and again, last week. It recently announced an increase in its borrowing by half for this fiscal. The burden is on the Centre to find the resources to immediately release the dues of the States and also reimburse them for their COVID-19-related expenses. It should seriously consider relaxing the fiscal deficit levels of the States from the current 3% level to at least 4.5%, just as it should relax its own level too. The States should at least be able to borrow more. The Centre should also give States the freedom to restart economic activity based on their own assessment. Not all States are in the same virus-spread position and within each State, not all districts are the same. This has to be acknowledged while planning a phased lifting of the lockdown. Greater leeway in restarting economic activity will relieve some of the financial stress, not just on the States but also on the Centre.