View: Tying centre and state pockets

States should have no problem, although seamless migration to the new system would need joint efforts. It is unlikely to entail any sizeable extra expenditure, but would involve organising supply chain and inventory management at all states and fa...

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Passing is the goal
The Centre has been deft to allow states to borrow more to tackle the Covid-19-instigated lockdown. It has linked enhanced borrowings to the states’ implementation of reforms in four key areas: the ‘one nation, one ration card’ scheme; ease of doing business; reforms of power sector distribution companies (discoms); and reforms in urban local bodies. Some states are miffed with these conditionalities, stating that they set a bad precedent.

That is debatable. Die hard reformists would support a carrot-and-stick approach. Others would argue that states should not be burdened with conditionalities at this point, adding that their capacity to undertake reforms varies.

Covid-19 has brought to the fore the acute distress of migrant workers. GoI has offered free grains and pulses, but cash transfers would provide immediate succour. It has also promised to let them use their ration cards across states. This is doable through a suitably designed IT system, with nationwide reconciliation of unique, verifiable identity of the beneficiary with Aadhaar-linking.

States should have no problem, although seamless migration to the new system would need joint efforts. It is unlikely to entail any sizeable extra expenditure, but would involve organising supply chain and inventory management at all states and fair price shops to deal with the dynamic demand.

Many MSMEs need support to survive and restart their operations to restore incomes and jobs. Ensuring steps for ease of doing business —such as giving permits, approval for land, electricity and water connections, or registering a business —for existing and new entities is a must. Manufacturing companies that want to relocate, or complement their operations in China, will do so in a country that is governed in a business-like way.

Reforms in power distribution require states to muster the political courage to dispense with free power to farmers and patronising power theft. The outstanding dues of distribution utilities across states are reported to have ballooned to Rs 90,577 crore at the end of March. This is unsustainable. All consumers must be made to pay for the power they consume.

Successive finance commissions have underscored the need for states to levy realistic user charges and empower local bodies. They have a huge potential for revenue generation in a rapidly urbanising India that needs investment to support growth. Property tax is one avenue, besides raising more revenue from vacant land. Greater institutional capacity for local bodies to issue municipal bonds will help.

States, though, have little leeway in fiscal expansion and cannot borrow even a rupee over and above their budgeted target for borrowings without the Centre’s approval. RBI has significantly raised the limits to the ways and means advances (WMA), a temporary liquidity facility.

Nevertheless, states have welcomed the Centre’s move to allow them to borrow up to 5% of gross state domestic product (GSDP) compared to the current limit of 3%. But borrowing costs for states have risen sharply, and a higher borrowing limit may not help fiscally weak states.

GoI can borrow cheaper. Typically, the gap between central government and state government bonds ranges between 50 and 75 basis points (bps). So, a better option would have been for GoI to on-lend its market borrowings to states. True, on-lending to states will push up the Centre’s fiscal deficit. But the combined fiscal deficit of GoI and state governments would not increase. The future fiscal burden will also be lower due to a lower interest burden.

States (and the Centre) must not curtail development expenditure. It will weaken the economy that faces the risk of GDP contraction for the first time in 40 years. So, GoI must loosen its purse strings without worrying about the shackles of fiscal responsibility. The non-government sector’s investment appetite is weak now, and that will enable GoI to borrow without crowding out funds for private investment, or putting an upward pressure on prices. Raising public health infrastructure must be a priority.

‘We are now experiencing a whole new level of uncertainty, as questions only the virus can answer complicate the outlook,’ said US Federal Reserve chair Jerome Powell at a Fed Listens event earlier this week. This holds for India, too.

The Centre and states can regularly update people through Parliament on how monies will be raised, expenditure re-allocated and spent to revive demand and growth.
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