The Reserve Bank of India (RBI) on October 27 published a report on the State finances on the basis of budgets. The central focus of the report is Covid-19 and the States’ response to it and hence the theme ‘Covid-19 and its Spatial Dimensions in India’.
It observed that the State governments have adopted measures such as deferment of partial or full salary, wages and bills, DA freeze, deduction of salary, suspension of encashment facility of earned leave, etc, for rationalisation of revenue expenditure. In spite of these steps, the net fall in tax receipts and the rise in expenditure, especially in public healthcare, have exerted enormous fiscal pressure on the State governments. The report has projected that the State governments’ gross fiscal deficit would widen beyond 4% of the gross domestic product in 2020-21.
Other serious implications of the pandemic on the State finances from the perspective of fiscal federalism are: rise of States’ indebtedness with the increase in net borrowings of the States/UTs by 40%; lowering of discretionary spending; curtailing of higher taxation; revisiting social sector expenditure; interim stagnation of structural reforms in the area of land, labour, capital and technology.
The analysis has brought out two noteworthy cases, one from Kerala and the other from Odisha to instruct the broader approach to be adopted in the future to deal with such pandemics and crises.
Enabling Local Govt
The report highlighted that Kerala’s efforts in the “last two decades to empower LSGs (local self-governments) through devolution of both financial resources and political and administrative power have strengthened the resource base and equipped them in a better position to deal with Covid-19”. The substantial devolution of funds to the local government institutions (LGIs) over the years has expanded the fiscal base; this helped the Panchayats emerge as “frontline institutions in containing the disease and in alleviating the distress caused to the poor and vulnerable”.
The continued empowerment of LGIs through effective devolution of funds, political will and the administrative efficiency, active involvement of local civil society organisations such as Kudumbasree, self-help groups (SHGs) and youth associations have helped in containing the large-scale community transmission of the disease.
Managing Financial Risk
The second case of Odisha represents an interesting picture in the overall framework of managing the financial risks augmented by both domestic and external factors.
In the context of “lack of transparency” in reporting financial risks of short, medium and long term, the States are at the receiving end of fiscal shocks and natural crises, including disasters. Seen from this perspective, the Odisha government’s initiative to assess fiscal risks through a three-stage approach deserves to be replicated by other States in accordance with the cumulative fiscal and monetary governance framework. The approach is: identification and measurement of fiscal risks; fiscal risk reporting; and mitigation and management of fiscal risk.
A dedicated fiscal risk and debt management cell and a high-level fiscal risk committee in the Finance department are in place. Identifying all the probable elements of fiscal risk are worked out as a ratio of GSDP and classified in terms of high, medium and low ranges. After this, a fiscal risk register is prepared to capture the type of risk (macroeconomic, institutional or specific) followed by the measures to address the identified and classified risks. It identified Covid-19 as a macroeconomic risk with high fiscal impact on the GSDP and transfer of funds from the Union government.
This initiative provided good results as the State succeeded in mobilising funds, namely State Disaster Response & Mitigation Fund, Guarantee Redemption Fund and Consolidated Sinking Fund (CSF). The report notes that “as a part of fiscal risk management measure for Covid-19 crisis, the State would utilise a portion of the CSF for amortisation of the entire open market borrowing during 2020-21”. Both Kerala and Odisha have lessons for fiscal management in general and empowering LGIs in particular to deal with crises.
The re-prioritisation of revenue expenditures by a rationale method, improving revenue mobilisation by expanding the tax base, digitalisation of tax administration are some of the steps necessary to augment the revenue. To deal with pandemics effectively in the future, it is imperative to, “empower the LGIs with higher resources”.
This is critical not just to enable them to function as institutions of self-government, but also “to shape the future of sub-national finances” in India. The study specifically mentions the weak revenue-raising capacities of the Urban Local Bodies (ULBs), which need immediate attention.
The increase of own revenue-raising capacities and the expansion of taxation powers of LGIs go a long way in empowering local governments as a true entity of third-tier of governance in the federal scheme of the Constitution. Weak collection of taxes is the main reason behind poor revenues of the LGIs. This needs to be fixed urgently by recruiting necessary functionaries such as bill collectors.
In India, the two-and-a-half decades of decentralised governance experience shows that the lack of political will is a major reason for the poor performance of LGIs. The pandemic is an opportunity for the political parties and State governments to act and empower the LGIs. The success of devolution as an indicator of decentralised governance depends on the corrective steps in the domain of political economy. The State governments must extend their support and cooperation to the LGIs to overcome the political economy factors to uphold the spirit of cooperative federalism.
(The author is PhD Fellow at Institute for Social and Economic Change and guest faculty at University Law College, Bangalore University)
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