UP Government’s Response to COVID-19 (till April 22)

Suyash Tiwari - April 23, 2020

As of April 22, Uttar Pradesh has seen 1,449 cases of coronavirus disease (COVID-19) and accounts for 6.8% of the total cases in India.  Of the 1,449 persons infected of the disease, 173 have recovered and 21 have died (3.1% of the total deaths in India due to the disease).  These proportions are quite lower as compared to the state’s share in the country’s population (16.5% as per Census 2011).  However, the same holds for the number of persons tested for COVID-19 as well, as of the 4.85 lakh persons tested in India, 37,490 persons (7.7%) have been tested in Uttar Pradesh.

To mitigate the spread of COVID-19 in the state, the state government has taken various measures over the past 2-3 months, spanning across areas such as health, law and order, and social welfare.  This includes imposition of lockdown in 16 districts starting March 23, which was extended to the entire state on March 24, before the nation-wide lockdown came into effect.   This blog post looks at the key measures taken by the state government in response to COVID-19 and the lockdown.

Before the lockdown

One of the earliest steps the state government took in response to COVID-19 was on January 27, when it planned to set up a 10-bed isolation ward in every district hospital and medical college, and increased vigilance on the Indo-Nepal border and airports.  Subsequently, on March 15, it ordered all travellers coming from foreign countries to be kept under surveillance and quarantine for a period of 14 days.  Between March 13 and March 17, the government ordered the closure of educational institutionscinema halls, museums, and tourist spots to prevent public gatherings.   On March 20, this was extended to include malls, and all religious, social, and cultural activities.  Further, to prevent unnecessary crowding, government hospitals were ordered to provide emergency services only.

Welfare measures:  The state government also undertook certain relief measures to provide aid to the persons affected due to COVID-19 and the consequent loss of economic activities.  These include: (i) free treatment for all persons infected with COVID-19, (ii) order to all employers to provide 28-days paid leave to infected or quarantined persons under the Epidemic Diseases Act, 1897, (iii) another order under the Act to all shops and factories to provide paid leave to all workers if the government orders temporary closure of their business, (iv) free one-month ration to 1.65 crore registered construction workers and daily wage labourers for April, and (v) Rs 1,000 per month of direct cash support to 20.4 lakh registered construction workers, and to 15 lakh street vendors and other unregistered workers.

During the lockdown

During the lockdown, the state government’s measures have been aimed towards: (i) strengthening the medical response in the state, (ii) providing relief to various sections of the society from issues being faced during the lockdown, including UP migrants in other states, and (iii) addressing difficulties being faced in the supply of essential goods and services.  For implementation of these measures, the government constituted 11 committees on March 26 for the work related to various departments.  On April 13, similar committees were constituted under the respective Ministers.

Healthcare

Medical facilities:   On March 23, committees were constituted in each district to determine the process for purchase of emergency medical equipment.   On March 25, the government ordered each of the 51 government and private medical colleges in the state to set up isolation wards of 200-300 beds.   It also proposed to conduct training programmes at district-level for AYUSH doctors, nursing staff, retired health workers, and officers of army medical corps.   This was subsequently made more comprehensive by including lab technicians, ward boys, and sweepers.

Testing:  On April 3, the government ordered setting up one testing lab in every medical college, or in a district hospital, in case there is no medical college in the district.   On April 20, the government decided to encourage the use of pool testing within the state to contain the spread of COVID-19.   It also approved consideration of plasma therapy as a treatment option for COVID-19.

Funding:  On April 3, the UP COVID Care Fund was set up for strengthening treatment facilities in medical colleges, and for expenditure on personal protection equipment, test kits, ventilators, isolation and quarantine wards, and telemedicine.  Subsequently, two Ordinances were promulgated on April 8 to deduct the salaries and allowances of Ministers, MLAs, and MLCs for 2020-21 by 30% to donate Rs 20 crore to the UP COVID Care Fund.   Further, Rs 1,509 crore was made available for the Fund by suspending the Local Area Development scheme for legislators for a period of one year.  In addition, the government increased the limit of the Contingency Fund from Rs 600 crore to Rs 1,200 crore through an Ordinance to allow for extra-budgetary expenditure on COVID-19 related measures.

Hotspots:  On April 8, the government sealed the hotspot areas across the state by prohibiting any movement in the area.  Only medical, sanitisation, and doorstep delivery teams are allowed to enter and exit the hotspot areas, and all enterprises are required to be completely closed.  The government has also ordered for door-to-door checking of the residents living in hotspot areas.

Essential goods and services

Other than the distribution of ration, the state government is providing food to persons staying in night shelters, with community kitchens being set up for persons who are unable to cook.  On April 17, the government made access to the Public Distribution System (PDS) universal till June 30, irrespective of the availability of ration card and Aadhaar card.  In case of death of a person, his ration card, maintenance allowance, and other benefits will be provided to his family as per their eligibility.

To prevent profiteering from sale of essential goods, on March 28, the government ordered the shopkeepers to display the price list in their shops.   On March 29, the government decided that the supply of electricity and water will be ensured and these connections will not be cut for one month.  Subsequently, it also ordered that fixed charges for electricity will not be levied for industries during the period of lockdown.  On April 3, the government ordered banks to remain open on holidays so that government relief assistance is available to the beneficiaries.

Migrants

From other states:  On March 26, the state government decided that migrant workers travelling through the state to other states such as Bihar will be provided food and shelter, and sent safely to their destination.  Subsequently, on March 28, the government decided to prepare the list of migrants who came to the state, provide them food, and keep them under surveillance and quarantine.  On April 22, the government allowed migrants from other states to go back to their home state if the respective state government decides to take them back.

From UP:  The state government requested other states to provide food and shelter to the migrants from UP present in their states, and requested the migrants to stay where they are.  To provide further support to migrants, the state government appointed senior administrative and police officials as nodal officers for each state where migrants from UP might be present.  These nodal officers are the main points of contact for migrants living in the respective states.  They are also responsible for coordinating with the respective state government and local administration to ensure the essential needs of migrants such as food and shelter are met, and alleviate their difficulties, if any.

On April 19, the government brought nearly 8,000 students who were studying in Kota back to the state.  The government allowed them to be kept in quarantine in their homes provided they download the Aarogya Setu app.

Economy

The state government is encouraging the purchase of produce by Farmer Producer Organisations directly from farms as an alternate option to mandis.   On April 13, the government formed a committee of officials to prepare a workplan for attracting investment made by countries such as USA and Japan, which is moving out of China, to the state.  In this regard, the government is planning to contact the embassies of various countries.  On April 19, it constituted another committee to work towards providing employment to about 5 lakh migrant workers who have returned to the state in the last 45 days.  On April 20, the government also allowed construction work on expressway projects to begin after preparation of an action plan.  In line with the advisories issued by the central government, the state government decided to provide relaxations from the lockdown in districts with less than 10 cases starting April 20.  The district administrations are preparing action plans for opening up industries in these districts, excluding the ones situated in the hotspot areas.

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Impact of Lockdown on Government Revenue

Suyash Tiwari - April 19, 2020

To mitigate the spread of coronavirus in India, the central government imposed a nation-wide lockdown on March 25, 2020.  The lockdown necessitated the suspension of all economic activities, except the ones classified as ‘essential’ from time to time, and the ones that can be carried out from home.  As a result, all economic activities which require persons to travel or work outside home, such as manufacturing of non-essential goods and construction, have stopped since then.  While this has resulted in a loss of income for many individuals and businesses, the ongoing 40-day lockdown is also going to severely impact the revenue of the central and state governments, primarily the tax revenue that they would have generated from all such economic activities.  

This note discusses the possible effect of the lockdown on the revenue of the central and state governments in 2020-21.  At this stage, the effect of the pandemic and the lockdown are difficult to estimate.  We do not know whether there will be partial restrictions when the current lockdown ends on 3rd May or the possibility of further action during the year.  Therefore, this note can be used as a first estimate to compute the impact under various scenarios.  For example, a reader who believes that the effect on GDP growth would be different than the IMF’s estimate used below can extrapolate the numbers to fit his assumptions.

The central government and most of the state governments passed their budget for the financial year 2020-21 during February-March 2020, before the lockdown.  The central government estimated a 10% growth in the country’s nominal GDP in 2020-21, and more than half of the states estimate their nominal GSDP growth rate in the range of 8%-13%.  Due to the unforeseen impact of the lockdown on the economy, the 2020-21 GDP growth rates are expected to be lower than these estimates.  As a result, the tax revenue that the central and state governments will be able to generate are expected to be much lower than the budgeted estimates, during the period of lockdown.

Centre’s revenue

Table 1 shows the revenue expected by the central government from various sources in 2020-21.  73% of the revenue (Rs 16.36 lakh crore) is expected to come through taxes.   Because of the impact of lockdown, the actual tax revenue realised at the end of the year could be much lower, depending on how much the nominal GDP growth in 2020-21 gets affected.  To estimate the impact on tax revenue, we assume that the tax-GDP ratio (i.e. an estimate of the tax generated out of each unit of economic activity) in 2020-21 will remain the same as the budget estimate.   This may be a conservative estimate of loss of revenue due to lockdown as many permitted activities such as agriculture, government services and essential services have zero or lower-than-average taxes.

Based on this assumption, a 1%-point fall in the nominal GDP growth rate could decrease centre’s net tax revenue by about Rs 15,000 crore in 2020-21, i.e. 0.7% of its total revenue.  The IMF has projected GDP growth for 2020-21 at 1.9%; given the inflation target of 4%, nominal GDP growth could be about 6%.  In that scenario where the nominal GDP growth falls by 4% point from 10% to 6% in 2020-21, net tax revenue loss could be about Rs 60,000 crore (2.7% of total revenue).  As mentioned above, the tax-GDP ratio would likely be lower than the budget estimate because of the type of activities permitted during the lockdown.   This would increase the adverse impact on tax revenue.

There is a further assumption being made above regarding tax-GDP.  While GST tends to move with overall GDP, direct taxes would depend on income growth of individuals and profit growth of companies.  In a lower GDP growth environment, the effect on these two items may be higher than the deceleration of nominal GDP, bringing down the tax-GDP ratio.  Further, customs duties depend on the value of imports, which may have a lower growth.   This would, to some extent, be mitigated by the increase in the rate of excise duty on petroleum products.

These computations have been made considering the 2019-20 revised estimate as the base and the 2020-21 budget estimate as being realistic when it was made.  However, these numbers may also be lower.  For instance, if we extrapolate the net tax revenue growth rate of April 2019 to February 2020 (as released by the Controller General of Accounts) to March 2020, the shortfall is of the order of Rs 1,62,000 crore or 11% of the revised estimate.  Thus, the shortfall in tax collections in 2020-21 may be significantly higher.

Table 1:  Central government's revenue in 2020-21 (Rs crore)

Source

Revenue

Share in Total Revenue

Net Tax Revenue

16,35,909

73%

Non-Tax Revenue

3,85,017

17%

Dividends and Profits

1,55,395

6.9%

Capital Receipts

2,24,967

10%

Disinvestment

2,10,000

9.4%

Total Revenue

22,45,893

-

Note:   Capital receipts and total revenue do not include borrowings.
Sources:  Union Budget Documents; PRS.

Other than taxes, the centre’s receipts consist of non-tax revenue and capital receipts.  A significant part of non-tax revenue is from dividends and profits of public sector enterprises (PSEs) and the RBI (Rs 1.55 lakh crore).  If profitability gets impacted, then there could be an adverse impact in these figures.  The major chunk of capital receipts is budgeted from disinvestment of PSEs (Rs 2.1 lakh crore).  Equity markets have declined sharply over the last month.  If equity markets remain volatile, the disinvestment process and consequently the disinvestment receipts could get affected.  Note that disinvestment receipts were targeted at Rs 2,10,000 crore, significantly higher than the Rs 50,299 crore raised in 2019-20.

Devolution to States

Like the centre, states also rely on taxes for most of their revenue.  As per their 2020-21 budget, on an average, nearly 70% of their revenue is estimated to come from taxes (45% from their own taxes and 25% from their share of centre’s taxes).  Lower collections in centre’s taxes because of the lockdown will also impact states’ share in them (also known as devolution).  Table 2 shows the share of states in centre’s tax revenue and how they could get impacted by a lower economic growth rate due to the lockdown.

Table 2:  Impact of lower economic growth during the lockdown on devolution in 2020-21 (Rs crore)

State/ UT

Share in divisible pool (%)

Devolution

Impact of 1% point drop in national nominal GDP growth rate on Devolution

Revenue impact as a percentage of state’s revenue receipts

Andhra Pradesh

4.11

32,238*

293

NA

Arunachal Pradesh

1.76

13,802

125

0.61%

Assam

3.13

26,776

243

0.26%

Bihar

10.06

91,181

829

0.45%

Chhattisgarh

3.42

26,803

244

0.29%

Delhi

-

-

-

-

Goa

0.39

3,027

28

0.21%

Gujarat

3.4

26,646

242

0.15%

Haryana

1.08

8,485

77

0.09%

Himachal Pradesh

0.8

6,266

57

0.15%

Jammu and Kashmir

-

15,200

138

0.16%

Jharkhand

3.31

25,980

236

0.31%

Karnataka

3.65

28,591

260

0.14%

Kerala

1.94

20,935

190

0.17%

Madhya Pradesh

7.89

61,841* 

562

NA

Maharashtra

6.14

48,109

437

0.13%

Manipur

0.72

5,630

51

0.28%

Meghalaya

0.77

5,999*

55

NA

Mizoram

0.51

3,968

36

0.37%

Nagaland

0.57

4,493

41

0.28%

Odisha

4.63

36,300

330

0.27%

Punjab

1.79

14,021

127

0.14%

Rajasthan

5.98

46,886

426

0.25%

Sikkim

0.39

3,043

28

0.35%

Tamil Nadu

4.19

32,849

299

0.14%

Telangana

2.13

16,727

152

0.11%

Tripura

0.71

5,560

51

0.30%

Uttar Pradesh

17.93

1,52,863

1,389

0.33%

Uttarakhand

1.1

8,657

79

0.19%

West Bengal

7.52

65,835

598

0.33%

Total 

100

8,38,710

7,624

0.22%

Note:  *Andhra Pradesh, Madhya Pradesh, and Meghalaya passed a vote on account, so their devolution data has been computed as the total devolution to states provided in the union budget multiplied by their share.  The devolution data for all other states has been taken from the state budget documents, which may not match with the union budget data in case of a few states.  Revenue receipts data not available for Andhra Pradesh, Madhya Pradesh, and Meghalaya.   The total for revenue receipt share has been computed excluding these three states.
Sources:  Union and State Budget Documents; 15th Finance Commission Report for 2020-21; PRS.

State GST

Out of the 45% revenue coming from state’s own taxes, 35% revenue is estimated to come from three taxes – state GST (19%), sales tax/ VAT (10%), and state excise (6%).  State GST is levied on the consumption of most goods and services within the state.  While state GST is the largest component of states’ own tax revenue, states do not have the autonomy to change tax rates on their own as the rates are decided by the GST Council.  Thus, due to lower GST revenue during the lockdown period, if a state wishes to increase GST rates for the remaining part of the year, it cannot do this on its own.

Table 3 shows the possible impact of a 1%-point decrease in the growth rates of nominal GSDP (GDP of the state) and its impact on state GST revenue in the year 2020-21.  These estimates are based on the assumption that the tax-GSDP ratio during the lockdown remains same as estimated for the 2020-21 budget.  However, as discussed earlier, the tax-GDP ratio for taxes such as GST is likely to decline.  The analysis estimates the minimum impact on states’ GST revenue and does not captures its full extent.

 Table 3:  Impact of lower GSDP growth during the lockdown on state GST revenue in 2020-21 (Rs crore) 

State/ UT

State GST revenue

Impact of 1% point drop in nominal GSDP growth rate on State GST revenue

Revenue impact as a percentage of state’s revenue receipts

Andhra Pradesh

NA 

NA

NA

Arunachal Pradesh

324

3

0.01%

Assam

13,935

128

0.14%

Bihar

20,800

187

0.10%

Chhattisgarh

10,701

97

0.12%

Delhi

23,800

215

0.39%

Goa

2,772

26

0.19%

Gujarat

33,050

292

0.18%

Haryana

22,350

198

0.22%

Himachal Pradesh

3,855

35

0.09%

Jammu and Kashmir

6,065

55

0.06%

Jharkhand

9,450

85

0.11%

Karnataka

47,319

445

0.25%

Kerala

32,388

289

0.25%

Madhya Pradesh

 NA

NA

NA

Maharashtra

1,07,146

957

0.28%

Manipur

914

8

0.05%

Meghalaya

NA

NA

NA

Mizoram

504

4

0.04%

Nagaland

541

5

0.04%

Odisha

15,469

139

0.11%

Punjab

15,859

141

0.16%

Rajasthan

28,250

255

0.15%

Sikkim

650

5

0.07%

Tamil Nadu

46,196

410

0.19%

Telangana

27,600

242

0.17%

Tripura

1,311

12

0.07%

Uttar Pradesh

55,673

525

0.12%

Uttarakhand

5,386

49

0.12%

West Bengal

33,153

298

0.17%

Total 

5,65,461

5,104

0.17%

Note:  Andhra Pradesh, Madhya Pradesh, and Meghalaya passed a vote on account, so data not available.  2020-21 GSDP data for Delhi was not available, so the GSDP growth rate in 2020-21 has been assumed to be the same as the growth rate in 2019-20 (10.5%).
Sources:  State Budget Documents; PRS.

Sales tax/ VAT and State Excise

These two taxes have been major sources of revenue for states, estimated to contribute 16% of states’ revenue in 2020-21.  With implementation of GST, states can now levy sales tax only on petroleum products (petrol, diesel, crude oil, natural gas, and aviation turbine fuel) and alcohol for human consumption.  However, the lockdown has severely impacted the consumption, and thus sale, of all of these goods as most of the transportation is prohibited and businesses selling alcohol are also shut.  As a result, the revenue coming from these taxes is likely to see a much larger impact as compared to the other taxes. 

In addition, alcohol is also subject to state excise.   Table 4 shows the average monthly impact of the lockdown on revenue from state excise.  That is, this estimates the loss of revenue for each month of lockdown, with the assumption that there is no production of alcohol for human consumption during such periods.

Table 4:  Average monthly impact of the lockdown on state excise revenue in 2020-21 (Rs crore)

State/ UT

State excise revenue

Average monthly impact on state excise revenue

Monthly revenue impact as a percentage of state’s revenue receipts

Andhra Pradesh

NA 

NA

NA

Arunachal Pradesh

157

13

0.06%

Assam

1,750

146

0.16%

Bihar

0

0

0.00%

Chhattisgarh

5,200

433

0.52%

Delhi

6,300

525

0.95%

Goa

548

46

0.34%

Gujarat

144

12

0.01%

Haryana

7,500

625

0.69%

Himachal Pradesh

1,788

149

0.39%

Jammu and Kashmir

1,450

121

0.14%

Jharkhand

2,301

192

0.25%

Karnataka

22,700

1,892

1.05%

Kerala

2,801

233

0.20%

Madhya Pradesh

 NA

NA

NA

Maharashtra

19,225

1,602

0.46%

Manipur

15

1

0.01%

Meghalaya

NA

NA

NA

Mizoram

1

0

0.00%

Nagaland

6

0

0.00%

Odisha

5,250

438

0.35%

Punjab

6,250

521

0.59%

Rajasthan

12,500

1,042

0.60%

Sikkim

248

21

0.26%

Tamil Nadu

8,134

678

0.31%

Telangana

16,000

1,333

0.93%

Tripura

266

22

0.13%

Uttar Pradesh

37,500

3,125

0.74%

Uttarakhand

3,400

283

0.67%

West Bengal

12,732

1,061

0.59%

Total 

1,74,164

14,514

0.48%

Note:  Andhra Pradesh, Madhya Pradesh, and Meghalaya passed a vote on account, so data not available.
Sources:  State Budget Documents; PRS.

Sales tax/VAT is collected from sale of alcohol and petroleum products.  We do not have any data on the reduction of sale of these items -- news reports indicating sale of alcohol in some states while petroleum products would be used by providers of essential services.  For estimating the impact on sales tax/ VAT revenue, we have assumed the following three scenarios: (i) 40% shortfall in tax collections, (ii) 60% shortfall in tax collections, and (iii) 80% shortfall in tax collections in any month of lockdown.   Table 5 shows the average monthly impact of the lockdown on sales tax/ VAT revenue under the three scenarios.  

Table 5:  Impact of lockdown on sales tax/ VAT revenue in 2020-21 (Rs crore)

State/ UT

Loss of sales tax/ VAT revenue per lockdown month

As a percentage of state’s revenue receipts

40% shortfall

60% shortfall

80% shortfall

40% shortfall

60% shortfall

80% shortfall

Andhra Pradesh

NA

NA

NA

NA

NA

NA

Arunachal Pradesh

9

14

18

0.04%

0.07%

0.09%

Assam

178

267

356

0.19%

0.29%

0.39%

Bihar

194

292

389

0.11%

0.16%

0.21%

Chhattisgarh

138

207

276

0.16%

0.25%

0.33%

Delhi

207

310

413

0.37%

0.56%

0.75%

Goa

41

62

83

0.31%

0.47%

0.62%

Gujarat

774

1,162

1,549

0.48%

0.72%

0.95%

Haryana

357

535

713

0.40%

0.59%

0.79%

Himachal Pradesh

56

84

112

0.15%

0.22%

0.29%

Jammu and Kashmir

50

75

100

0.06%

0.09%

0.11%

Jharkhand

195

293

391

0.26%

0.39%

0.52%

Karnataka

593

889

1,186

0.33%

0.49%

0.66%

Kerala

775

1,163

1,551

0.68%

1.01%

1.35%

Madhya Pradesh

NA

NA

NA

NA

NA

NA

Maharashtra

1,333

2,000

2,667

0.38%

0.58%

0.77%

Manipur

9

14

18

0.05%

0.08%

0.10%

Meghalaya

NA

NA

NA

NA

NA

NA

Mizoram

3

4

5

0.03%

0.04%

0.06%

Nagaland

9

13

18

0.06%

0.09%

0.12%

Odisha

292

438

583

0.23%

0.35%

0.47%

Punjab

186

279

372

0.21%

0.32%

0.42%

Rajasthan

700

1,050

1,400

0.40%

0.61%

0.81%

Sikkim

7

11

15

0.09%

0.14%

0.18%

Tamil Nadu

1,868

2,802

3,736

0.85%

1.28%

1.70%

Telangana

880

1,320

1,760

0.61%

0.92%

1.23%

Tripura

15

22

30

0.09%

0.13%

0.17%

Uttar Pradesh

943

1,414

1,886

0.22%

0.33%

0.45%

Uttarakhand

66

98

131

0.15%

0.23%

0.31%

West Bengal

251

377

503

0.14%

0.21%

0.28%

Total 

10,130

15,195

20,260

0.34%

0.51%

0.67%

Note:   Andhra Pradesh, Madhya Pradesh, and Meghalaya passed a vote on account, so data not available.
Sources:  State Budget Documents; PRS.

How much can GST compensation help?

The shortfall in state GST revenue could get offset by the GST compensation provided to states by the central government.   The GST (Compensation to States) Act, 2017, requires the central government to provide compensation to states for loss of revenue arising due to GST implementation until 2022.  For this purpose, the Act guarantees a 14% annual growth rate in state GST revenue, which is much higher than the growth likely in the year 2020-21.  As a result, the central government would be required to provide states a compensation equivalent to the shortfall in growth in their state GST revenue, in comparison to the 14% growth.

However, it is likely that there may not be sufficient funds to provide compensation to states in 2020-21.  Compensation to states is given out of the GST Compensation Fund, which consists of collections of a cess levied specifically to generate funds for this purpose.  The cess is levied on coal, tobacco and its products, pan masala, automobiles, and aerated drinks.  The cess collections may see a shortfall as the sale of many of these goods is likely to be affected this year.  Note that domestic automobile sales declined 18% in 2019-20 over the previous year while coal production stayed constant.

In the 2020-21 budget, the central government estimated to provide Rs 1,35,368 crore as compensation to states, which is close to the total compensation estimated by states in their budgets.  However, due to the lockdown, the cess collections financing these grants are estimated to decrease, whereas the compensation requirement of states is estimated to increase due to lower GST collections.   While there is a risk that any incremental requirement may not be met, states’ revenue can see a much larger impact if cess collections are not even sufficient to meet their existing amounts as per the 2020-21 budgets (Table 6).  States, on an average, depend on GST compensation grants for 4.4% of their revenue in 2020-21.  However, states such as Gujarat, Punjab, and Delhi expect almost 14-15% of their revenue in 2020-21 to come in the form of GST compensation grants.

Table 6:   GST compensation grants estimated by states in 2020-21 (Rs crore)

State/ UT

GST Compensation

GST compensation as a percentage of state’s revenue receipts

Andhra Pradesh

NA 

NA

Arunachal Pradesh

0

0.0%

Assam

1,000

1.1%

Bihar

3,500

1.9%

Chhattisgarh

2,938

3.5%

Delhi

7,800

14.1%

Goa

1,358

10.2%

Gujarat

22,510

13.9%

Haryana

7,000

7.8%

Himachal Pradesh

3,338

8.7%

Jammu and Kashmir

3,177

3.6%

Jharkhand

1,568

2.1%

Karnataka

16,116

9.0%

Kerala

0

0.0%

Madhya Pradesh

 NA

NA

Maharashtra

10,000

2.9%

Manipur

0

0.0%

Meghalaya

NA

NA

Mizoram

0

0.0%

Nagaland

0

0.0%

Odisha

6,200

5.0%

Punjab

12,975

14.7%

Rajasthan

4,800

2.8%

Sikkim

0

0.0%

Tamil Nadu

10,300

4.7%

Telangana

0

0.0%

Tripura

208

1.2%

Uttar Pradesh

7,608

1.8%

Uttarakhand

3,571

8.4%

West Bengal

4,928

2.7%

Total 

1,30,894

4.4%

Note:   Andhra Pradesh, Madhya Pradesh, and Meghalaya passed a vote on account, so data not available.
Sources:  State Budget Documents; PRS.

A similar scenario played out last year when due to the economic slowdown, the cess collections were not sufficient to meet states’ compensation requirements.  As a result, states have received the GST compensation only till November 2019.  Note that the GST (Compensation to States) Act, 2017 provides that the GST Council can recommend other funding mechanisms for the Compensation Fund.  For instance, this can be done when there is a shortfall of money in the Fund for providing compensation to states.

Impact on State Finances

In light of such severe stress on the revenue side, states will have to either cut their budgeted expenditure or increase their borrowings to meet the budget targets.  Note that because of the coronavirus pandemic and the lockdown, states are also making unforeseen expenditure in the health sector and for providing relief from the lockdown.  As a result, many states have already started working on the former by drawing up plans to defer or cut their planned expenditure, or divert funds for planned expenditure towards these immediate requirements.  With relatively less flexibility on the side of revenue expenditure, capital expenditure could see a larger cut in many states.  For instance, revenue expenditure includes expenditure committed towards payment of interest, salaries, and pension.  On average, this committed expenditure uses up 50% of states’ revenue.  However, some states have already gone ahead and deferred or cut the expenditure towards payment of salaries.  Also, with private consumption and investment expected to remain sluggish, reduction of government expenditure could lead to a further decline in GDP.

The other option for states is to increase their borrowings.  However, states’ borrowings are limited by their FRBM laws at 3% of their GSDP (with a further 0.5% of GSDP if they fulfil some conditions).  States also need the consent of the central government to borrow money.  While most states had already budgeted their fiscal deficit for 2020-21 near the upper limit, it seems some states do have some fiscal space to borrow more (Table 7).   However, with GSDP expected to take a hit because of the lockdown, fiscal deficit as a percentage of GSDP for all states could be higher than budgeted targets, even if they do not make any additional borrowings.

Table 7:  Fiscal deficit estimates for 2020-21 as a percentage of GSDP

State/ UT

2019-20 (Revised)

2020-21 (Budgeted)

Andhra Pradesh

NA 

NA

Arunachal Pradesh

3.1%

2.4%

Assam

5.7%

2.3%

Bihar

9.5%

3.0%

Chhattisgarh

6.4%

3.2%

Delhi

-0.1%

0.5%

Goa

4.7%

5.0%

Gujarat

1.6%

1.8%

Haryana

2.8%

2.7%

Himachal Pradesh

6.4%

4.0%

Jammu and Kashmir

NA 

5.0%

Jharkhand

2.3%

2.1%

Karnataka

2.3%

2.6%

Kerala

3.0%

3.0%

Madhya Pradesh

NA 

NA

Maharashtra

2.7%

1.7%

Manipur

8.9%

4.1%

Meghalaya

 NA

 NA

Mizoram

8.3%

1.7%

Nagaland

9.0%

4.8%

Odisha

3.4%

3.0%

Punjab

3.0%

2.9%

Rajasthan

3.2%

3.0%

Sikkim

4.3%

3.0%

Tamil Nadu

3.0%

2.8%

Telangana

2.3%

3.0%

Tripura

6.2%

3.5%

Uttar Pradesh

3.0%

3.0%

Uttarakhand

2.5%

2.6%

West Bengal

2.6%

2.2%

Centre

3.8%

3.5%

Note:   Andhra Pradesh, Madhya Pradesh, and Meghalaya passed a vote on account, so data not available.
Sources:  Union and State Budget Documents; PRS.

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Explaining the difference between the government finances reported in the Economic Survey and the Union Budget 2019-20

Suyash Tiwari - July 10, 2019

The Finance Minister, Ms. Nirmala Sitharaman, presented the Union Budget for the financial year 2019-20 in Parliament on July 5, 2019.  In the 2019-20 budget, the government presented the estimates of its expenditure and receipts for the year 2019-20.  The budget also gave an account of how much money the government raised or spent in 2017-18.  In addition, the budget also presented the revised estimates made by the government for the year 2018-19 in comparison to the estimates it had given to Parliament in the previous year’s budget.

What are revised estimates?

Some of the estimates made by the government might change during the course of the year.  For instance, once the year gets underway, some ministries may need more funds than what was actually allocated to them in the budget, or the receipts expected from certain sources might change.  Such deviations from the budget estimates get reflected in the figures released by the government at later stages as part of the subsequent budgets.  Once the year ends, the actual numbers are audited by the Comptroller and Auditor General of India (CAG), post which they are presented to Parliament with the upcoming budget, i.e. two years after the estimates are made.

For instance, estimates for the year 2018-19 were presented as part of the 2018-19 budget in February 2018.  In the 2019-20 interim budget presented in February 2019 (10 months after the financial year 2018-19 got underway), the government revised these estimates based on the actual receipts and expenditure accounted so far during the year and incorporated estimates for the remaining two months.

The actual receipts and expenditure accounts of the central government are maintained by the Controller General of Accounts (CGA), Ministry of Finance on a monthly basis.  In addition to the monthly accounts, the CGA also publishes the provisional unaudited figures for the financial year by the end of the month of May.  Once these provisional figures are audited by the CAG, they are presented as actuals in next year’s budget.  The CGA reported the figures for 2018-19 on May 31, 2019.[1]  The Economic Survey 2018-19 presented on July 4, 2019 uses these figures.[2] 

The budget presented on July 5 replicates the revised estimates reported as part of the interim budget (February 1, 2019).  Thus, it did not take into account the updated figures for the year 2018-19 from the CGA.

Table 1 gives a comparison of the 2018-19 revised estimates presented by the central government in the budget with the provisional unaudited figures maintained by the CGA for the year 2018-19.[3]

Table 1:  Budget at a Glance: Comparison of 2018-19 revised estimates with CGA figures (unaudited) (Rs crore)

 

Actuals
2017-18

Budgeted
2018-19

Revised
2018-19

Provisional
2018-19

Difference
(RE 2018-19 to Provisional 2018-19)

Revenue Expenditure

18,78,833

 21,41,772

 21,40,612

20,08,463

-1,32,149

Capital Expenditure

2,63,140

 3,00,441

 3,16,623

3,02,959

-13,664

Total Expenditure

21,41,973

 24,42,213

 24,57,235

23,11,422

 -1,45,813

Revenue Receipts

14,35,233

 17,25,738

 17,29,682

15,63,170

-1,66,512

Capital Receipts

 1,15,678

 92,199

 93,155

1,02,885

9,730

of which:

 

 

 

 

 

Recoveries of Loans

 15,633

 12,199

 13,155

17,840

4,685

Other receipts (including disinvestments)

 1,00,045

 80,000

 80,000

85,045

5,045

Total Receipts (without borrowings)

15,50,911

 18,17,937

 18,22,837

16,66,055

-1,56,782

Revenue Deficit

 4,43,600

 4,16,034

 4,10,930

4,45,293

34,363

% of GDP

2.6

2.2

2.2

2.4

 

Fiscal Deficit

 5,91,062

 6,24,276

 6,34,398

6,45,367

10,969

% of GDP

3.5

3.3

3.4

3.4

 

Primary Deficit

 62,110

 48,481

 46,828

62,692

15,864

% of GDP

0.4

0.3

0.2

0.3

 

Sources:  Budget at a Glance, Union Budget 2019-20; Controller General of Accounts, Ministry of Finance; PRS.

The 2018-19 provisional figures for revenue receipts is Rs 15,63,170 crore, which is Rs 1,66,512 crore less than the revised estimates.  This is largely due to Rs 1,67,455 crore shortfall in centre’s net tax revenue between the revised estimates and the provisional estimates (Table 2).

Major taxes which see a shortfall between the gross tax revenue presented in the revised estimates vis-à-vis the provisional figures are income tax (Rs 67,346 crore) and GST (Rs 59,930 crore).  Non-tax revenue and disinvestment receipts as per the provisional figures are higher than the revised estimates.

Table 2:  Break up of central government receipts: Comparison of 2018-19 RE with CGA figures (unaudited) (Rs crore)

 

Actuals
2017-18

Budgeted
2018-19

Revised
2018-19

Provisional
2018-19

Difference
(RE 2018-19 to Provisional 2018-19)

Gross Tax Revenue

19,19,009

22,71,242

22,48,175

20,80,203

-1,67,972

of which:

 

 

 

 

 

Corporation Tax

5,71,202

6,21,000

6,71,000

6,63,572

-7,428

Taxes on Income

4,30,772

5,29,000

5,29,000

4,61,654

-67,346

Goods and Services Tax

4,42,562

7,43,900

6,43,900

5,83,970

-59,930

Customs

1,29,030

1,12,500

1,30,038

1,17,930

-12,108

Union Excise Duties

2,59,431

2,59,600

2,59,612

2,30,998

-28,614

A. Centre's Net Tax Revenue

12,42,488

14,80,649

14,84,406

13,16,951

-1,67,455

B. Non Tax Revenue

1,92,745

2,45,089

2,45,276

2,46,219

943

of which:

 

 

 

 

 

Interest Receipts

13,574

15,162

12,047

12,815

768

Dividend and Profits

91,361

1,07,312

1,19,264

1,13,424

-5,840

Other Non-Tax Revenue

87,810

1,22,615

1,13,965

1,19,980

6,015

C. Capital Receipts (without borrowings)

1,15,678

92,199

93,155

1,02,885

9,730

of which:

 

 

 

 

 

Disinvestment

1,00,045

80,000

80,000

85,045

5,045

Receipts (without borrowings) (A+B+C)

15,50,911

18,17,937

18,22,837

16,66,055

-1,56,782

Borrowings

5,91,062

6,24,276

6,34,398

6,45,367

10,969

Total Receipts (including borrowings)

21,41,973

24,42,213

24,57,235

23,11,422

-1,45,813

Note:  Centre’s net tax revenue is gross tax revenue less share of states in central taxes.  Figures for GST include receipts from the GST compensation cess.  Note that GST was levied for a nine-month period during the year 2017-18, starting July 2017.

Sources:  Receipts Budget, Union Budget 2019-20; Controller General of Accounts, Ministry of Finance; PRS.

While the provisional figures show a considerable decrease in receipts (Rs 1,56,782 crore) as compared to the revised estimates, fiscal deficit has not shown a comparable increase.  Fiscal deficit is estimated to be Rs 10,969 crore higher than the revised estimates as per the provisional accounts.

On the expenditure side, the total expenditure as per the provisional figures show a decrease of Rs 1,45,813 crore as compared to the revised estimates.  Certain Ministries and expenditure items have seen a decrease in expenditure as compared to the revised estimates made by the government.  As per the provisional accounts, the expenditure of the Ministry of Agriculture and Farmers’ Welfare and the Ministry of Consumer Affairs, Food and Public Distribution are Rs 22,133 crore and Rs 70,712 crore lower than the revised estimates, respectively.  The decrease in the Ministries’ expenditure as a percentage of the revised estimates are 29% and 39%, respectively.  The food subsidy according to CGA was Rs 1,01,904 crore, which was Rs 69,394 crore lower than the revised estimates for the year 2018-19 given in the budget documents.

 

[1] Accounts of the Union Government of India (Provisional/Unaudited) for the Financial Year 2018-19, Press Information Bureau, Ministry of Finance, May 31, 2019.

[2] Fiscal Developments, Economic Survey 2018-19, https://www.indiabudget.gov.in/economicsurvey/doc/vol2chapter/echap02_vol2.pdf.

[3] Controller General of Accounts, Ministry of Finance, March 2018-19, http://www.cga.nic.in/MonthlyReport/Published/3/2018-2019.aspx.

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Explained: The recent rise in petroleum prices

Suyash Tiwari - September 27, 2018 1 Comment

In the past few months, retail prices of petrol and diesel have consistently increased and have reached all-time high levels.  On September 24, 2018, the retail price of petrol in Delhi was Rs 82.72/litre, and that of diesel was Rs 74.02/litre.  In Mumbai, these prices were even higher at Rs 90.08/litre and Rs 78.58/litre, respectively.

The difference in retail prices in the two cities is because of the different tax rates levied by the respective state governments on the same products.  This blog post explains the major tax components in the price structure of petrol and diesel and how tax rates vary across states.  It also analyses the shift in the taxation of these products, its effect on retail prices, and the consequent revenue generated by the central and state governments.

What are the components of the price structure of petrol and diesel?

Retail prices of petrol and diesel in India are revised by oil companies on a daily basis, according to changes in the price of global crude oil.  However, the price paid by oil companies makes up 51% of the retail price in case of petrol, and 61% in the case of diesel (Table 1).  The break-up of retail prices of petrol and diesel in Delhi, as on September 24, 2018, shows that over 45% of the retail price of petrol comprises central and states taxes.  In the case of diesel, this is close to 36%.

At present, the central government has the power to tax the production of petroleum products, while states have the power to tax their sale.  The central government levies an excise duty of Rs 19.5/litre on petrol and Rs 15.3/litre on diesel.  These make up 24% and 21% of the retail prices of petrol and diesel, respectively.

Table 1

While excise duty rates are uniform across the country, states levy sales tax/value added tax (VAT), the rates of which differ across states.  The figure below shows the different tax rates levied by states on petrol and diesel, which results in their varying retail prices across the country.  For instance, the tax rates levied by states on petrol ranges from 17% in Goa to 39% in Maharashtra.

Effective Sales Tax

Note that unlike excise duty, sales tax is an ad valorem tax, i.e., it does not have a fixed value, and is charged as a percentage of the price of the product.  This implies that while the excise duty component of the price structure is fixed, the sales tax component is charged as a proportion of the price paid by oil companies, which in turn depends on the global crude oil price.  With the recent increase in the global prices, and subsequently the retail prices, some states such as Rajasthan, Andhra Pradesh, West Bengal, and Karnataka have announced tax rate cuts.

How have retail prices in India changed vis-à-vis the global crude oil price?

India’s dependence on imports for consumption of petroleum products has increased over the years.  For instance, in 1998-99, net imports were 69% of the total consumption, which increased to 93% in 2017-18.  Because of a large share of imports in the domestic consumption, any change in the global price of crude oil has a significant impact on the domestic prices of petroleum products.  The following figures show the trend in price of global crude oil and retail price of petrol and diesel in India, over the last six years.

Petrol

Diesel

The global price of crude oil (Indian basket) decreased from USD 112/barrel in September 2012 to USD 28/barrel in January 2016.  Though the global price dropped by 75% during this period, retail prices of petrol and diesel in India decreased only by 13% and 5%, respectively.  This disparity in decrease of global and Indian retail prices was because of increase in taxes levied on petrol and diesel, which nullified the benefit of the sharp decline in the global price.  Between October 2014and June 2016, the excise duty on petrol increased from Rs 11.02/litre to Rs 21.48/litre.  In the same period, the excise duty on diesel increased from Rs 5.11/litre to Rs 17.33/litre.

Over the years, the central government has used taxes to prevent sharp fluctuations in the retail price of diesel and petrol.  For instance, in the past, when global crude oil price has increased, duties have been cut.  Since January 2016, the global crude oil price has increased by 158% from USD 28/barrel to USD 73/barrel in August 2018.  However, during this period, excise duty has been reduced only once by Rs 2/litre in October 2017.  While the central government has not signalled any excise duty cut so far, it remains to be seen if any rate cut will happen in case the global crude oil price rises further.  With US economic sanctions on Iran coming into effect on November 4, 2018, India may face a shortfall in supply since Iran is India’s third largest oil supplier.  Moreover, Organization of Petroleum Exporting Countries (OPEC) and Russia have not indicated any increase in supply from their side yet to offset the possible effect of sanctions.  As a result, in a scenario with no tax rate cut, this could increase the retail prices of petrol and diesel even further.

How has the revenue generated from taxing petroleum products changed over the years?

As a result of successive increases in excise duty between November 2014 and January 2016, the year-on-year growth rate of excise duty collections increased from 27% in 2014-15 to 80% in 2015-16.  In comparison, the growth rate of sales tax collections was 6% in 2014-15 and 4% in 2015-16.  The figure below shows the tax collections from the levy of excise duty and sales tax on petroleum products.  From 2011-12 to 2017-18, excise duty and sales tax collections grew annually at a rate of 22% and 11%, respectively.

Tax revenue

How is this revenue shared between centre and states?

Though central taxes are levied by the centre, it gets only 58% of the revenue from the levy of these taxes.  The rest 42% is devolved to the states as per the recommendations of the 14th Finance Commission.  However, excise duty levied on petrol and diesel consists of two broad components – (i) excise duty component, and (ii) road and infrastructure cess.  Of this, only the revenue generated from the excise duty component is devolved to states.  Revenue generated by the centre from any cess is not devolved to states.

The cess component was increased by Rs 2/litre to Rs 8/litre in the Union Budget 2018-19.  However, this was done by reducing the excise duty component by the same amount, so as to keep the overall rate the same.  Essentially this provision shifted the revenue of Rs 2/litre of petrol and diesel from states’ divisible pool of taxes to the cess revenue, which is entirely with the centre.  This cess revenue is earmarked for financing infrastructure projects.

At present, of the Rs 19.5/litre excise duty levied on petrol, Rs 11.5/litre is the duty component, and Rs 8/litre is the cess component.  Therefore, accounting for 42% share of states in the duty component, centre effectively gets a revenue of Rs 14.7/litre, while states get Rs 4.8/litre.  Similarly, excise duty of Rs 15.3/litre levied on diesel consists of a cess component of Rs 8/litre.  Thus, excise duty on diesel effectively generates revenue of Rs 12.2/litre for the centre and Rs 3.1/litre for states.

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Explained: Recent changes in MSPs

Suyash Tiwari - July 16, 2018

Recently, the Cabinet Committee on Economic Affairs approved an increase in the Minimum Support Prices (MSPs) for Kharif crops for the 2018-19 marketing season.  Subsequently, the Commission for Agricultural Costs and Prices (CACP) released its price policy report for Kharif crops for the marketing season 2018-19.

The central government notifies MSPs based on the recommendations of the CACP.  These recommendations are made separately for the Kharif marketing season (KMS) and the Rabi marketing season (RMS).  Post harvesting, the government procures crops from farmers at the MSP notified for that season, in order to ensure remunerative prices to farmers for their produce.

In this blog post, we look at how MSPs are determined, changes brought in them over time, and their effectiveness for farmers across different states.

How are Minimum Support Prices determined?

The CACP considers various factors such as the cost of cultivation and production, productivity of crops, and market prices for the determination of MSPs.  The National Commission on Farmers(Chair: Prof. M. S. Swaminathan) in 2006 had recommended that MSPs must be at least 50% more than the cost of production.  In this year’s budget speech, the Finance Minister said that MSPs would be fixed at least at 50% more than the cost of production.

The CACP calculates cost of production at three levels: (i) A2, which includes cost of inputs such as seeds, fertilizer, labour; (ii) A2+FL, which includes the implied cost of family labour (FL); and (iii) C2, which includes the implied rent on land and interest on capital assets over and above A2+FL.

Table 1 shows the cost of production as calculated by the CACP and the approved MSPs for KMS 2018-19.  For paddy (common), the MSP was increased from Rs 1,550/quintal in 2017-18 to Rs 1,750/quintal in 2018-19.  This price would give a farmer a profit of 50.1% on the cost of production A2+FL.  However, the profit calculated on the cost of production C2 would be 12.2%.  It has been argued that the cost of production should be taken as C2 for calculating MSPs.  In such a scenario, this would have increased the MSP to Rs 2,340/quintal, much above the current MSP of Rs 1,750/quintal.

Figure 1

Which are the major crops that are procured at MSPs?

Every year, MSPs are announced for 23 crops.  However, public procurement is limited to a few crops such as paddy, wheat and, to a limited extent, pulses as shown in Figure 1.

Figure 2

The procurement is also limited to a few states.  Three states which produce 49% of the national wheat output account for 93% of procurement.  For paddy, six states with 40% production share have 77% share of the procurement.  As a result, in these states, farmers focus on cultivating these crops over other crops such as pulses, oilseeds, and coarse grains.

Due to limitations on the procurement side (both crop-wise and state-wise), all farmers do not receive benefits of increase in MSPs.  The CACP has noted in its 2018-19 price policy report that the inability of farmers to sell at MSPs is one of the key areas of concern.  Farmers who are unable to sell their produce at MSPs have to sell it at market prices, which may be much lower than the MSPs.

How have MSPs for major crops changed over time?

Higher procurement of paddy and wheat, as compared to other crops at MSPs tilts the production cycle towards these crops.  In order to balance this and encourage the production of pulses, there is a larger proportional increase in the MSPs of pulses over the years as seen in Figure 2.  In addition to this, it is also used as a measure to encourage farmers to shift from water-intensive crops such as paddy and wheat to pulses, which relatively require less water for irrigation.

Figure 3

What is the effectiveness of MSPs across states?

The MSP fixed for each crop is uniform for the entire country.  However, the production cost of crops vary across states.  Figure 3 highlights the MSP of paddy and the variation in its cost of production across states in 2018-19.

Figure 4

For example, production cost for paddy at the A2+FL level is Rs 702/quintal in Punjab and Rs 2,102/quintal in Maharashtra.  Due to this differentiation, while the MSP of Rs 1,750/quintal of paddy will result in a profit of 149% to a farmer in Punjab, it will result in a loss of 17% to a farmer in Maharashtra.  Similarly, at the C2 level, the production cost for paddy is Rs 1,174/quintal in Punjab and Rs 2,481/quintal in Maharashtra.  In this scenario, a farmer in Punjab may get 49% return, while his counterpart in Maharashtra may make a loss of 29%.

Figure 5

Figure 4 highlights the MSP of wheat and the variation in its cost of production across states in 2017-18. In the case of wheat, the cost of production in Maharashtra and West Bengal is much more than the cost in rest of the states.  At the A2+FL level, the cost of production in West Bengal is Rs 1,777/quintal.  This is significantly higher than in states like Haryana and Punjab, where the cost is Rs 736/quintal and Rs 642/quintal, respectively.  In this case, while a wheat growing farmer suffers a loss of 2% in West Bengal, a farmer in Haryana makes a profit of 136%.  The return in Punjab is even higher at 1.5 times or more the cost of production.

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