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May 21, 2020

PFM Actions by Indian States to Combat COVID-19

Covid
Posted by Ashok Rao[1]

The global pandemic is posing unprecedented challenges in fiscal management to governments across the world. Typical PFM responses from national governments have included increased spending on fiscal stimulus packages, deep spending cuts in other areas, reallocation of budgets to finance emergency spending, relaxation of internal controls and procurement laws, and decentralization of financial powers to facilitate quicker decision making.

More or less on similar lines, the Indian government has also taken a series of steps. These are outlined in an earlier post on the PFM Blog entitled ‘PFM Solutions in India to Combat the COVID-19 Pandemic’ (https://blog-pfm.imf.org/pfmblog/2020/04/india-pfm-covid.html). This blog focuses on the PFM measures taken by provincial (state) governments in India over and above the actions of the national (union) government. It is useful to note that in India, a handful of large states can be compared to nations in terms of GDP and population. State governments exercise wide powers when it comes to planning and managing their finances. They are suffering on two fronts as a result of the pandemic: reduced revenue collections following the nation-wide 54-day lockdown (the largest in the world) and increased demand for public expenditure to fight the epidemic.

Pay cuts for elected representatives and government officials appears to be the most popular move amongst Indian states. The cut exceeds 50% in many cases and has been as high as 75% (for legislators in Telangana). Some states have also defered a portion of their payrollto free up cash resources in the short term. Following the announcement by the union government, many state governments have announced a freeze of the “dearness allowance” (an allowance paid to mitigate the effect of inflation) for government staff. Other austerity measures include heavy restrictions on new spending programs and projects unless COVID-related, and limits on certain capital purchases such as televisions, air-conditioners, vehicles, and computers (West Bengal, Karnataka).

The delegation of financial powers has been relaxed in many states. The spending authority of heads of departments, for example, has been temporarily enhanced (Karnataka, Delhi). Budget allocations to contingency funds have seen a sharp spike (more than 200% in Bihar). Some states have temporarily simplified approval and payment processes to enable staff working from home to submit bills online to their state treasuries for payment (Odisha).

Each state government has come up with its own set of measures to boost plummeting revenue collections. The Chief Minister’s Relief Fund to gather and channel monetary aid from business entities as well as individuals for the COVID-19 fight has been launched by almost every state: public donations to the funds have been substantial. State governments have lifted the clampdown on liquor sales in a move to shore up revenues. Karnataka has mooted a proposal to sell vacant corner plots it owns in the capital city of Bengaluru to generate revenue. Kerala has appealed to the central government to allow it to raise money through the issuance of Pandemic Bonds at a concessional interest rate of 5 per cent, and additionally, to exclude such bonds in calculating the government’s overall debt limit.

The recent announcement by the union government increasing states’ borrowing limit from 3 to 5 per cent of gross state domestic product (GSDP) is expected to enable states to borrow an additional 4.28 trillion Indian rupees. The Chairman of the current (15th) Central Finance Commission has suggested that states should invoke the “escape clause” in their fiscal responsibility and budget management legislation to relax the mandatory fiscal deficit target by half a percentage point.

State governments have brought the axe down on legislators’ discretionary grants (a fixed sum of money that each state legislator gets to spend at his discretion in his constituency) for at least one year and have diverted such grants to COVID-related spending. This move has touched a raw nerve among elected representatives. The discretionary power attached to spending such grants has been a source of bouquets as well as brickbats in the past.

Most states have relaxed their procurement laws and regulations to facilitate emergency spending. State procuring agencies are facing tough market conditions such as the non-availability of materials from a single source or of the required specification, the urgency of current needs, supplier-dictated payment terms, and disruption in supply chains. Announced relaxations include increasing the powers of procuring entities; dispensing partially or completely with elaborate tender processes; the waiving of supplier guarantee requirements; and payment of 100% advances to suppliers. Most states have attempted to constrain the impact of these measures by time-limiting them, capping their value or restricting them to certain categories of goods and services. They have also announced measures to exercise more stringent ex-post controls and audit in due course. The Delhi government has clarified to its procuring entities that invoking the force majeure clause by counterparties in government contracts is justified in the present circumstances.

To summarize, state governments are dealing with a wide range of issues and challenges, are learning from each other, and improvising day by day. For now, they seem to be ahead of the menacing tiger behind. As India prepares to emerge out of the lockdown, whether they will win the race in the longer term is anybody’s guess.

This article is part of a series related to the Coronavirus Crisis. All of our articles covering the topic can be found on our PFM Blog Coronavirus Articles page.

 

[1] Ashok Rao is a PFM consultant from Bengaluru, India. He is the Executive Director of Management and Governance Consulting (www.magc.in) and can be reached at ashok@magc.in

Note: The posts on the IMF PFM Blog should not be reported as representing the views of the IMF. The views expressed are those of the authors and do not necessarily represent those of the IMF or IMF policy.

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