The finances of Indian states have historically been in disarray barring a few well-managed ones, but the lockdown of people and goods across Asia’s third-largest economy has hit tax revenues from fuel to stamp duties
A three-week nationwide lockdown is testing the resilience of India's state governments, with analysts warning that essential public services and health care for millions of Indians will be in jeopardy without further federal and central bank support.
States are slashing salaries, demanding an increase in borrowing limits and asking for fund transfers from New Delhi as their tax revenues dry up due to large scale travel restrictions to contain the spread of the flu-like respiratory disease.
The Reserve Bank of India (RBI) has already raised short-term borrowing limits to help tide over the funding crunch, but more outright support from the central bank is going to be critical, analysts said.
"States revenues are unlikely to be adequate in the current circumstances so this is where the RBI will have to step in much more aggressively," said Upasna Bhardwaj, senior economist at Kotak Mahindra Bank.
"And not just through open market purchases of government securities but possibly state development loans as well," she added, citing a need for some amount of direct monetisation of the federal government's deficit too.
The finances of Indian states have historically been in disarray barring a few well-managed ones, but the lockdown of people and goods across Asia's third-largest economy has hit tax revenues from fuel to stamp duties.
The RBI did not comment on the story.
Former RBI Governor Raghuram Rajan in a blogpost on Saturday called the current crisis, India's greatest emergency since Independence.
India has so far identified 4,421 coronavirus cases, of which 114 have died.
"The state and centre have to come together to figure out quickly some combination of public and NGO provision, private participation and direct benefit transfers that will allow needy households to see through the next few months," Rajan wrote, as the lockdown has taken away the livelihoods of millions.
In a recent video-conference meeting between state leaders and the prime minister, some opposition party leaders proposed the government immediately release to the states compensation dues for the goods and services tax (GST).
Many also demanded an increase in borrowing limits set by the federal government under the Fiscal Responsibility and Budget Management (FRBM) Act that caps total borrowing of a state at 3% of its GDP.
"With fiscal support being crucial at this juncture, states might receive a breather through a temporary relaxation in the FRBM deficit and debt thresholds," said DBS economist Radhika Rao.
Kotak Mahindra Bank estimates that of the 18 large state government deficits which had projected a gross fiscal deficit of 2.5% before the outbreak, they could now potentially see deficits rising to 3.5-4%.