States need more funds than allowed by the FRBM Act

With the States at the forefront in battling the Covid pandemic, it is clear that they should be equipped with more resources than are available at their disposal. It is, therefore, odd that the Chairman of the 15th Finance Commission should be reading out the FRBM (Fiscal Responsibility and Budget Management Act) provisions to them. He wants them to manage with the additional 0.5 per cent leeway (in addition to 3 per cent of GSDP) provided to them under the Act to deal with extraordinary situations. This is not enough to meet the extra demands being made on the government machinery. The fiscal stress is on account of both the ‘numerator’ and the ‘denominator’ — namely, the rising difference between expenditure and revenue in the case of the former, on account of the sharp drop in revenues accruing to the States amidst rising social commitments; and a shrinkage in the GSDP in the case of the denominator. The escape clause is likely to be breached without the State governments doing what is needed to alleviate immediate distress; forget planning for the long-term to bring about a ‘V-shaped revival’. There are enough grounds to move an amendment to the FRBM Act, extending the scope of the escape clause. The apprehensions that the gains of fiscal and financial reforms will be lost are misplaced; these rules are meant for normal situations, not emergencies. They can be restored as the economy normalises. As experts have pointed out, in the event of a solvency crisis in business and a demand crisis at large, a fiscal stimulus is the only instrument that can work; monetary policy cannot really go beyond addressing liquidity constraints.

The Covid shock on the fisc of States has come on top of a stressed fiscal situation arising out of the prolonged slump in economic growth. SGST collections as well as Central transfers to the States have fallen short of Budget estimates. The ‘Ways and Means’ Advances limit has been relaxed, but this may not be enough. A one-time monetisation of the Centre’s deficit (the RBI buying government bonds directly from the primary market and releasing money) seems the best way forward. The Centre, States, the RBI and the Finance Commission should work towards a plan on the possible extent of the deficit — which includes a roadmap to get back to a business as usual scenario.

At this juncture, printing money to run the economy is unlikely to spur inflation, as food stocks are abundant to meet any demand boost and capacity utilisation in industry is low. Comparisons with the inflationary impact of the fiscal stimulus unveiled in the aftermath of the global financial crisis are inappropriate, because India was growing at a high rate, with signs of overheating already built in. This is the time to think out-of-the-box.