Maharashtra’s fighting a fiscal battle against Covid

Maharashtra has been one of the epicentres of India in the Covid-19 episode. Even as the State government grapples with the exit from the current lockdown, it will have to raise budgetary resources for battling the situation during the next 3-4 months.

Maharashtra, pre-Covid, has been a fiscally well-managed State. Its fiscal deficit (FD) to GSDP ratio has been below the 3 per cent limit set by the Maharashtra Fiscal Responsibility Budgetary Management (MFRBM) Act. The debt stock to GSDP ratio has been around 16 per cent, again well-contained within the 17.5 per cent limit set under the MFRBM.

The State Budget for 2020-21 has been created positing a 13.6 per cent nominal GSDP growth rate and projects the GSDP at ₹32.79 lakh crore. The revenue deficit (RD) is projected at 0.29 per cent of GSDP whereas the FD is projected at 1.67 per cent of the GSDP. The Budget numbers are consistent with debt stock to GSDP ratio of 16.15 per cent. Let us call this the ‘Business As Usual’ (BAU) scenario (see Table 1).

Lowered revenues

In the wake of Covid-19, the central assumption of the GSDP growing at 13.5 per cent comes under a shadow. GSDP growth will depend on a number of factors, the most important being how quickly the pandemic is contained. Since most projections for the Indian economy hint at a 2 per cent growth rate, we assume the real growth rate for Maharashtra to be the same. With a 5 per cent inflation assumption, the nominal growth rate of the GSDP collapses from 13.6 per cent under BAU to mere 7 per cent; the realised GSDP may stand at only ₹30.86 lakh crore. With such a sharp reduction in the GSDP, the debt to GSDP ratio increases and the State starts looking fiscally vulnerable.

Lower tax collections add to the problem. The biggest taxes for the State are the SGST (25 per cent), sales tax (9 per cent), stamp and registration fees (7 per cent) and State excise duties (4.43 per cent). It is expected that all the four taxes will exhibit far reduced revenues compared to normal years. We assume that tax collections in Maharashtra will grow purely at the inflation rate of 5 per cent. With assumptions of lowered revenue receipts and lowered GSDP levels under the “Covid scenario”, the deficit and borrowing numbers look vastly different from the BAU scenario (see Table 2).

With a reduction in tax collection and the GSDP, the debt stock to GSDP ratio exceeds the allowed limit of 17.5 per cent under the Covid scenario in FY21. And this exercise does not even account for higher expenses that the State government will have to undertake on account of Covid.

Additional State expenditure

It is fairly difficult to calculate the additional expenditure that the State Government may have to bear this year. Reasons? The Centre has already declared a relief package of ₹1.7 lakh crore to be delivered through free food, higher MNREGA wages, ex-gratia payments, DBTs etc. It is extremely difficult to estimate what percentage of the Central relief will be accrued to Maharashtra. For example, the MGNREGA is a demand-driven scheme. To the extent that the Gram Panchayats do not quickly undertake permissible works under the scheme, or that the administration does not conform to issuance of Utilisation Certificates, the benefits of MNREGA may not really accrue to the rural poor of Maharashtra. And to that extent, the State Government will have to spend more from its own kitty.

The other issue in estimating State expenditures is the possibility that some expenses can be diverted from other accounts to the Covid account in FY21. Due to the social distancing norms that any public works programme will have to adhere to, it may entirely be possible that some expenditures may be postponed for some time.

In any which case, a breach in the MFRBM limits is imminent. It is time for the State government to undertake legal recourse to amend the existing limits under the MFRBM Act. The permissible debt to GSDP ratio under the Covid emergency should be revised to at least 19 per cent. Together with other State governments, representations should be made to the Union government and Finance Commission to get permissions for deviations from current fiscal glide paths. When battling for survival, adhering to FRBM targets cannot be a priority. Laws have to be amended flexibly so that the needs of the vulnerable are met.

The writer is a Pune-based economist

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