Mahatma Gandhi National Rural Employment Guarantee Act: Review of implementation

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Mahatma Gandhi National Rural Employment Guarantee Act: Review of implementation

Joyita - September 23, 2013 Comments

In the recently concluded Monsoon Session of Parliament , the Parliamentary Standing Committee on Rural Development released a report on the implementation of the Mahatma Gandhi National Rural Development Act, 2005 (MGNREGA). This blog provides a brief introduction to the key provisions of MGNREGA , followed by an overview of the major findings and recommendations of the Standing Committee.

I. MGNREGA: A brief introduction

A. Objectives: MGNREGA, which is the largest work guarantee programme in the world, was enacted in 2005 with the primary objective of guaranteeing 100 days of wage employment per year to rural households. Secondly, it aims at addressing causes of chronic poverty through the 'works' (projects) that are undertaken, and thus ensuring sustainable development. Finally, there is an emphasis on strengthening the process of decentralisation through giving a significant role to Panchayati Raj Institutions (PRIs) in planning and implementing these works.

B. Key features:

Legal right to work: Unlike earlier employment guarantee schemes, the Act provides a legal right to employment for adult members of rural households. At least one third beneficiaries have to be women. Wages must be paid according to the wages specified for agricultural labourers in the state under the Minimum Wages Act, 1948, unless the central government notifies a wage rate (this should not be less than Rs 60 per day). At present, wage rates are determined by the central government but vary across states, ranging from Rs 135 per day to Rs 214 per day.
Time bound guarantee of work and unemployment allowance: Employment must be provided with 15 days of being demanded failing which an ‘unemployment allowance’ must be given.
Decentralised planning: Gram sabhas must recommend the works that are to be undertaken and at least 50% of the works must be executed by them. PRIs are primarily responsible for planning, implementation and monitoring of the works that are undertaken.
Work site facilities: All work sites should have facilities such as crèches, drinking water and first aid.
Transparency and accountability: There are provisions for proactive disclosure through wall writings, citizen information boards, Management Information Systems and social audits. Social audits are conducted by gram sabhas to enable the community to monitor the implementation of the scheme.
Funding: Funding is shared between the centre and the states. There are three major items of expenditure – wages (for unskilled, semi-skilled and skilled labour), material and administrative costs. The central government bears 100% of the cost of unskilled labour, 75% of the cost of semi-skilled and skilled labour, 75% of the cost of materials and 6% of the administrative costs.

MGNREGA was implemented in phases, starting from February 2006, and at present it covers all districts of the country with the exception of those that have a 100% urban population. The Act provides a list of works that can be undertaken to generate employment related to water conservation, drought proofing, land development, and flood control and protection works. Table 1 provides information regarding employment generation and expenditure under MGNREGA.

Table 1: MGNREGA: Key indicators

Year	Number of households provided employment (in crore)	Average number of person days of work per household	Total Expenditure (in lakh)
2006-07	2.10	43	8823.35
2007-08	3.39	42	15856.88
2008-09	4.51	48	27250.10
2009-10	5.25	54	37905.23
2010-11	5.49	47	39377.27
2011-12*	4.99	43	38034.69
2012-13**	4.25	36	28073.51

Source: Standing Committee on Rural Development; PRS. Note: *Provisional ** As on 31.01.2013

II. Findings and Recommendations of the Standing Committee on Rural Development

A. Achievements: The Standing Committee highlighted several achievements of MGNREGA in the seven years of its implementation, especially:

Ensuring livelihood for people in rural areas.
Large scale participation of women, Scheduled Castes and Scheduled Tribes (SCs/STs) and other traditionally marginalised sections of society. SCs/STs account for 51% of the total person-days generated and women account for 47% of the total person-days generated.
Increasing the wage rate in rural areas and strengthening the rural economy through the creation of infrastructure assets.
Facilitating sustainable development, and
Strengthening PRIs by involving them in the planning and monitoring of the scheme.

B. Challenges: However, the Committee found several issues with the implementation of the scheme. As Table 1 (above) shows, the average number of days of employment provided to households has been lower than the mandated 100 days, and has been decreasing since 2010-11. Key issues that the Committee raised include

Fabrication of job cards: While as many as 12.5 crore households have been issued job cards out of an estimated 13.8 crore rural households ( as per the 2001 census), there are several issues related to existence of fake job cards, inclusion of fictitious names, missing entries and delays in making entries in job cards.
Delay in payment of wages: Most states have failed to disburse wages within 15 days as mandated by MGNREGA. In addition, workers are not compensated for a delay in payment of wages.
Non payment of unemployment allowances: Most states do not pay an unemployment allowance when work is not given on demand. The non-issuance of dated receipts of demanded work prevents workers from claiming an unemployment allowance.
Large number of incomplete works: There has been a delay in the completion of works under MGNREGA and inspection of projects has been irregular. Implementing agencies were able to complete only 98 lakh works out of 296 lakh works. As Table 2 shows, a large percentage of works remain incomplete under MGNREGA and the work completion rate appears to be decreasing in recent years.

Table 2: Work completion rate

Year	Work completion rate (%)
2006-07	46.34
2007-08	45.99
2008-09	43.76
2009-10	48.94
2010-11	50.86
2011-12*	20.25
2012-13*	15.02
Total	33.22

Source: Standing Committee on Rural Development. Note: * As on 30.01.2013

Other key challenges include poor quality of assets created, several instances of corruption in the implementation of MGNREGA, and insufficient involvement of PRIs.

C. Recommendations: The Committee made the following recommendations, based on its findings:

Regulation of job cards: Offences such as not recording employment related information in job cards and unlawful possession of job cards with elected PRI representatives and MGNREGA functionaries should be made punishable under the Act.
Participation of women: Since the income of female workers typically raises the standard of living of their households to a greater extent than their male counterparts, the participation of women must be increased through raising awareness about MGNREGA.
Participation of people with disabilities: Special works (projects) must be identified for people with disabilities; and special job cards must be issued and personnel must be employed to ensure their participation.
Utilisation of funds: The Committee found that a large amount of funds allocated for MGNREGA have remained unutilised. For example, in 2010-11, 27.31% of the funds remained unutilised. The Committee recommends that the Department of Rural Development should analyse reasons for poor utilisation of funds and take steps to improve the same. In addition, it should initiate action against officers found guilty of misappropriating funds under MGNREGA.
Context specific projects and convergence: Since states are at various stages of socio-economic development, they have varied requirements for development. Therefore, state governments should be allowed to undertake works that are pertinent to their context. There should be more emphasis on skilled and semi-skilled work under MGNREGA. In addition, the Committee recommends a greater emphasis on convergence with other schemes such as the National Rural Livelihoods Mission, National Rural Health Mission, etc.
Payment of unemployment allowance: Dated receipts for demanded work should be issued so that workers can claim unemployment allowance. Funds for unemployment allowance should be met by the central government.
Regular monitoring: National Level Monitors (NLMs) are deployed by the Ministry of Rural Development for regular and special monitoring of MGNREGA and to enquire into complaints regarding mis-utilisation of funds, etc. The Committee recommends that the frequency of monitoring by NLMs should increase and appropriate measures should be taken by states based on their recommendations. Additionally, social audits must mandatorily be held every six months. The Committee observes that the performance of MGNREGA is better in states with effective social audit mechanisms.
Training of functionaries: Training and capacity building of elected representatives and other functionaries of PRIs must be done regularly as it will facilitate their involvement in the implementation of MGNREGA.

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MGNREGA,

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Monsoon Session of Parliament: What did the MPs ask the government?

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Anurag Vaishnav and Mridhula Raghavan - September 19, 2020 Comments

Between the last time Parliament met in March 2020 and the ongoing Monsoon session (a period of nearly six months), the government issued 941 notifications across sectors in response to the COVID-19 pandemic. It also announced a Rs 20 lakh crore economic package to improve the state of the economy and provide relief to those affected by the nationwide lockdown. In addition, the government also proposed long-term policy changes during this period in sectors such as agriculture, economy, and education.

One of the key roles of a Member of Parliament (MP) is to hold the government accountable for its policies and actions. Parliamentary questions are one of the key instruments MPs use to exercise this role. Questions help MPs seek information from the government on matters of public importance and on the status of implementation of its policies and programmes.

However, in view of the prevailing extraordinary situation due to COVID-19, both Lok Sabha and Rajya Sabha have suspended their Question Hour, which would have allowed MPs to seek oral responses from Ministers and ask follow-up questions. However, unstarred questions are admitted, for which written answers are provided.

This post provides an overview of the government’s response to some of the key questions raised by MPs during the first five days (September 14, 2020, to September 18, 2020) of the session.

Unstarred questions in the Monsoon session

A total of 1,950 unstarred questions have been asked in the first five days of the Monsoon session of the Parliament (1,150 questions in Lok Sabha and 800 questions in Rajya Sabha). The Ministries in focus for the questions were: Health (154 questions), Agriculture (127 questions), Education (104 questions), Finance (96 questions), and Railways (80 questions).

Questions ranged from the impact of the lockdown to strategy for vaccine procurement, to the status of the programmes announced to alleviate COVID related issues. Besides COVID-19, there were questions around India-China trade, locust attacks, and custodial deaths.

On COVID-19 testing and vaccine strategy

Testing data and Health infrastructure: In response to a question, the government informed that India is conducting nearly 10-11 lakh tests every day and so far, a total of 6.05 crore samples have been tested for COVID-19. Nearly 40% of the confirmed cases are persons between the age of 26-44.

To improve health capacity, as of Sep 15, a total of 15,360 COVID treatment facilities have been created with:

13,20,881 dedicated isolation bed (without oxygen support)
2,32,516 oxygen supported isolation beds
63,194 ICU beds (including 32,409 ventilator beds)

Vaccine development: The Central Drugs Standard Control Organisation has granted permission for conduct of clinical trials in the country to the following: (i) Bharat Biotech International Ltd. and Cadila Healthcare (these are in phase 1 and phase 2 of trials), and (ii) Serum Institute of India Pvt. Ltd (for vaccine developed by University of Oxford/AstraZeneca - this is in Phase 3, or advanced phase, of the trials).

The government is also exploring the possibility of cooperation with Russia for advancing the COVID-19 vaccine in India.

Health insurance: The Ministry noted that data on the number of healthcare workers who are infected by COVID-19 or who have lost lives during COVID duty is not maintained at the central level. As per data from the Pradhan Mantri Garib Kalyan Insurance Package, a total of 155 medical staff, including 64 doctors, have died due to COVID-19. The scheme provides an insurance cover of Rs 50 lakh (including loss of life) to healthcare providers, including community health workers, who may have come in direct contact of COVID-19 patients and who may be at risk of being impacted by this.

Under the Ayushman Bharat Scheme, a total of 4.03 lakh hospitalisations have been registered (and authorised) towards the treatment of COVID-19. Under Ayushman Bharat, the government provides health cover of five lakh rupees per family per year, for secondary and tertiary care to around 10.7 crore vulnerable families.

Impact on other health services: In light of COVID-19, that there has been a 19.4% drop in Hepatitis-B birth doses administered and a 31% drop in vaccination sessions held in health facilities and outreach sessions from April-June 2020 as compared to the same period last year. Similarly, there has been a drop of 23.9% in institutional delivery in the April-June 2020 quarter as compared to the same period last year.

Impact of COVID-19 on Indian economy

Trade: Responding to a question on the impact of COVID on exports, the government provided the following data:

Overall exports declined by 25.4% during April-June 2020 (compared to the same period in 2019). However, data for August 2020 shows a recovery in exports with the decline reducing to 12.7% (compared to August 2019).
The export of goods from Special Economic Zones (SEZs) was Rs 81,481 crore in the April-June 2020, 37% lower than the corresponding period in 2019 (Rs 1,30,129 crore).

India-China trade: Members also raised questions on the impact of COVID and the border issue with Ladakh on Indo-China trade. The government held that it has taken steps to balance the trade with China by increasing exports and reducing import dependence. The trade deficit with China during April-June 2020 was USD 5.5 billion as compared to USD 13.1 billion during the same period last year.

Table 1: Trade deficit with China (in billion dollars)

Year	2016-17	2017-18	2018-19	2019-20	April - June 2019	April - June 2020
Export	10.17	13.33	16.75	16.61	4.16	5.53
Import	61.28	76.38	70.31	65.26	17.26	11.01
Total Trade	71.45	89.71	87.07	81.87	21.42	16.55
Trade Deficit	-51.11	-63.04	-53.56	-48.64	-13.1	-5.48

Sources: Unstarred Question No. 647, Lok Sabha, answered on September 16, 2020; PRS.

With regard to the import of Active Pharmaceutical Ingredients (bulk drugs), bulk drugs account for nearly 63% of total pharmaceutical imports in India as per government data. Of these, 68% of the bulk drugs imported by India in 2019-20 were from China.

Civil aviation: The government informed that the revenue of Indian carriers was down by nearly 86% during April-June 2020, as compared to the same period last year.

Table 2: Impact of COVID-19 on the civil aviation sector

Indicator	Previously	Now	% Change
*Revenue related*	*April-June 2019*	*April-June 2020*
Revenue of Indian carriers	Rs 25,517 crore	Rs 3,651 crore	-85.7%
Revenue of Air India	Rs 7,066 crore	Rs 1,531 crore	-78.3%
Revenue of Airport Operators	Rs 5,745 crore	Rs 894 crore	-84.4%
*Employment related*	*March 31, 2020*	*July 31, 2020*
Employment at airlines	74,887	69,589	-7.1%
Employment at airports	67,760	64,514	-4.8%
Employment at ground handling agencies	37,720	29,254	-22.4%
Employment at Cargo operators	9,555	8,538	-10.6%
*Traffic related*	*March-July 2019*	*March-July 2020*
Total domestic traffic	5,85,30,038	1,20,84,952	-79.4%
Total international traffic	93,45,469	11,55,590	-87.6%

Sources: Unstarred Question No. 872, Lok Sabha, answered on September 17, 2020; PRS.

Vande Bharat Mission: The Vande Bharat Mission was launched on May 7, 2020 to facilitate the return of Indian nationals stranded in various countries. As of September 10, 2020, a total of 13,74,237 Indians have returned to India and the total cost incurred for this effort was Rs 22.5 crore. Of these, about 3 lakh people were working outside India. The government stated that SWADES (Skilled Workers Arrival Database for Employment Support) initiative has been launched to conduct a skill mapping exercise of the returning citizens under the Vande Bharat Mission.

Metro rail: Due to the lockdown, metro services in different cities came to a halt. This has led to a loss of Rs 1,609 crore for the Delhi Metro. The loss incurred due to the halting of the other metros was: Rs 170 crore for Bengaluru Metro, Rs 90 crore for Lucknow Metro, Rs 80 crore for Chennai Metro, and Rs 34 crore for Kochi Metro.

On Shramik special trains and Vande Bharat Mission

Railways revenue: As of August 2020, the total revenue of Railways was Rs 41,844 crore, which is a decline of 42% over the corresponding period last year. Of this, Rs 39,648 crore (95%) was freight revenue. During April to August 2020, the passenger traffic was 1.3% of the traffic in the corresponding period last year, and the freight traffic was 86.7% of the traffic seen in the corresponding period last year. The total amount of refund made to passengers due to cancellation of trains booked till April 14, 2020 (for the journey period between March 22, 2020 and August 12, 2020) was Rs 3,371 crore.

Special trains: Several members asked questions about the Shramik special trains, the number of migrant labourers who returned to their home states, and the loss of revenue to railways due to restrictions on travel and movement. The government responded that 4,621 shramik special trains were run from May 1 to August 31, 2020, which transported 63 lakh passengers across the country. Based on the data provided by states, 97 persons passed away while travelling on Shramik special trains (as of September 9, 2020). A total fare of Rs 433 crore was collected from the state governments for running these special trains.

The government also started other special trains (15 pairs of Rajdhani Express and special trains for examinations such as JEE and NEET). The average occupancy in these trains (from May 12 to August 31, 2020) was around 82%.

On Migrant labourers, relief measures and MGNREGS

A total of 1.05 crore migrant workers have returned to their home state till now (maximum to Uttar Pradesh, followed by Bihar, West Bengal, and Rajasthan). State-wise details are listed in the table below.

Table 3: Number of migrant workers who have returned to home-state (as of September 14, 2020)

State	Workers who have returned to the state
Uttar Pradesh	32,49,638
Bihar	15,00,612
West Bengal	13,84,693
Rajasthan	13,08,130
Madhya Pradesh	7,53,581
Jharkhand	5,30,047
Punjab	5,15,642
Assam	4,26,441
Kerala	3,11,124
Maharashtra	1,82,990
Tamil Nadu	72,145

Sources: Unstarred Question No. 197, Lok Sabha, answered on September 14, 2020; PRS.

Responding to a question on whether free grains under the Aatma Nirbhar Scheme had reached the migrant workers, the government stated that no data on the number of migrants/stranded migrant persons across the country was available with the Department of Food Distribution and that the responsibility of identification of beneficiaries under this scheme was entrusted with states. The government informed that states have indicated about 2.8 crore migrant worker beneficiaries. As of August 31, 2020, food grains have been distributed to 2.67 crore of the identified beneficiaries for the months of June and July 2020.

MGNREGS: On whether the migrant labourers have been provided jobs under the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS), the government said that there is no provision to register a job cardholder categorized as a migrant labourer in the card in the scheme. It stated that a total of 86.82 lakh new job cards have been issued this year so far, against a total of 64.96 lakh cards issued during the same period last year. The employment provided under the scheme was nearly 100% higher for the months of June and July 2020, as compared to the corresponding months in 2019. The total demand (from April 2020 to September 12, 2020) for employment under the scheme was 22.5 crore persons, a 39% increase from 16.2 crore persons for 2019-20 (during the same period).

EPF withdrawal: In March 2020, as part of the relief package, the government increased the withdrawal limit from the Employee’s Provident Fund (EPF) accounts. In areas declared to be affected by an epidemic or pandemic, members are permitted to withdraw three months’ salary or 75% of the amount lying in the member’s PF account, whichever is lesser. The government stated that a total of Rs 39,403 crore has been withdrawn from EPF from March 25, 2020 to August 31, 2020. The withdrawal was highest in the states of Maharashtra (Rs 7,838 crore), Karnataka (Rs 5,744 crore), and Tamil Nadu (Rs 4,985 crore).

Other questions

Locust attack: Several members sought to know whether the locust attacks caused damage to crops and whether the government has provided any compensation to the affected farmers. The Ministry of Agriculture responded that the locust incursions were reported in the 10 states of Bihar, Chhattisgarh, Gujarat, Haryana, Madhya Pradesh, Maharashtra, Punjab, Rajasthan, Uttarakhand, and Uttar Pradesh. The Rajasthan government has reported crop damage of 33% or more in nearly 3,400-hectare area. Haryana has reported below 33% crop damage in 6,166-hectare area. No damage was reported in Gujarat, Chhattisgarh, Punjab, and Bihar. On compensation, the government stated that pest attack has been notified as a natural disaster and states could provide relief under the State Disaster Response Fund. However, no state government has reported any data yet on the distribution of relief to affected farmers.

Functioning of virtual courts: The Ministry of Law and Justice informed that 11,93,046 hearings were done by video conferencing between March 24, 2020 and July 15, 2020 by district and subordinate courts across India. Further, it stated that to handle challenges related to COVID-19, the government has allocated nearly Rs 30 crore for providing video conferencing equipment and facilitating help desk counters for e-filing in various court complexes

Custodial deaths: The government informed that a total of 1,697 persons died under police/ judicial custody, and a total of 112 cases were registered as encounter deaths (from April 2019 to March 2020). State-wise details are noted below in Table 4 for select states (they comprise 75% of the total custodial and encounter deaths in 2019-20). On whether the government is considering a legislation to prevent the torture of individuals by police and public officials, the Ministry of Home Affairs informed that police and public order are state subjects and there is no proposal to bring a legislation in this regard.

Table 4: Custodial deaths and Encounter deaths across select states (April 2019-March 2020)

State	Custodial deaths	Encounter deaths
Uttar Pradesh	403	26
Madhya Pradesh	157	3
West Bengal	122	1
Bihar	110	5
Punjab	99	1
Maharashtra	94	3
Rajasthan	84	2
Haryana	77	1
Tamil Nadu	69	3
Chhattisgarh	59	39

Sources: Unstarred Question No. 292, Lok Sabha, answered on September 15, 2020; PRS

Cost of GST compensation

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Suyash Tiwari - August 25, 2020 Comments

Later this week, the GST Council will meet to discuss the issue of GST compensation to states. The central government is required to compensate states for any loss of revenue they incur due to GST. The Centre must pay this compensation on a bi-monthly basis, but over the past one year these payments have been delayed by several months due to lack of funds. The COVID-19 pandemic and the consequent lockdown have amplified the issue manifold, with both centre and states facing a revenue shortfall, limiting the ability of the Centre to meet states’ compensation needs.

Why is the Centre required to compensate states for GST?

With GST implementation in 2017, the principle of indirect taxation for many goods and services changed from origin-based to destination-based. This means that the ability to tax goods and services and raise revenue shifted from origin states (where the good or service is produced) to destination states (where it is consumed). This change posed a risk of revenue uncertainty for some states. This concern of states was addressed through constitutional amendments, requiring Parliament to make a law to provide for compensation to states for five years to avoid any revenue loss due to GST.

For this purpose, the GST (Compensation to States) Act was enacted in 2017 on the recommendation of the GST Council. The Act guarantees all states an annual growth rate of 14% in their GST revenue during the period July 2017-June 2022. If a state’s GST revenue grows slower than 14%, such ‘loss of revenue’ will be taken care of by the Centre by providing GST compensation grants to the state. To provide these grants, the Centre levies a GST compensation cess on certain luxury and sin goods such as cigarettes and tobacco products, pan masala, caffeinated beverages, coal, and certain passenger vehicles. The Act requires the Centre to credit this cess revenue into a separate Compensation Fund and all compensation grants to states are required to be paid out of the money available in this Fund.

How much compensation is provided to states?

For 2018-19, Centre gave Rs 81,141 crore to states as GST compensation. However, for the year 2019-20, the compensation requirement of states nearly doubled to Rs 1.65 lakh crore. A huge increase in requirement implies that states’ GST revenue grew at a slower rate during 2019-20. This can be attributed to the economic slowdown seen last year, which resulted in a nominal GDP growth of 7.2%. This was significantly lower than the 12% GDP growth forecast in the 2019-20 union budget (Figure 1).

Figure 1: GDP growth rate (2017-21)

Sources: Union Budget Documents; MOSPI; PRS.

In 2019-20, the gross GST revenue (Centre+states) increased by just 4% over the previous year. Despite this, due to the compensation guarantee, all states could achieve the growth rate of 14% in their GST revenue – much higher than the overall growth in GST revenue. However, there was a delay in payment of compensation from Centre. More than Rs 64,000 crore of the compensation requirement of states for 2019-20 was met in the financial year 2020-21.

What led to a delay in payment of compensation to states?

In 2019-20, the delay in payment was observed due to insufficient funds with Centre for providing compensation to states. These funds are raised by levying a compensation cess on the sale of certain goods, some of which were affected by the economic slowdown. For instance, in 2019-20, sales of passenger vehicles declined by almost 18% and coal offtake from domestic coal companies reduced by nearly 5%, over the previous year. As a result, cess collections registered a growth of just 0.4% in 2019-20 (Figure 2), against the 104% increase seen in the compensation requirement of states. This resulted in a shortfall of funds of nearly Rs 70,000 crore.

Figure 2: Cess collections insufficient for providing compensation

Note: In 2017-18, GST was implemented for only nine months. Compensation amount shown may not match with the amount released in that financial year because of delay in releases.

Sources: Union Budget Documents; Ministry of Finance; GST Council; Lok Sabha Questions; PRS.

How can compensation be paid to states if cess collections are insufficient?

The shortfall in collections for 2019-20 was met through: (i) surplus cess collections from previous years, (ii) partial cess collections of 2020-21, and (iii) a transfer of Rs 33,412 crore of unsettled GST funds from the Centre to the Compensation Fund. These unsettled funds are GST collections, generated in 2017-18 from inter-state and foreign trade, that have not yet been settled between centre and states.

In the 2020-21 budget, the Centre has estimated a 10% growth in nominal GDP. However, due to the impact of COVID-19 and the lockdown, the actual growth in 2020-21 is likely to be much lower. In such a scenario, states’ GST revenue would also be much lower than expected, thus leading to a higher compensation requirement. However, the ability of Centre to pay compensation depends on the cess collections, which are also getting impacted this year. For instance, cess collections during the period Apr-Jun 2020 have been 41% lower in comparison to the same period last year. Moreover, of the Rs 14,482 crore collections made during this period, Rs 8,680 crore has been likely used up for paying compensation for 2019-20.

Note that under the GST (Compensation to States) Act, 2017, Centre can provide compensation to states only through the money available in the Compensation Fund. The Union Finance Minister, in her budget speech in February 2020, clarified that transfers to the Fund would be limited only to collections of the GST compensation cess. Despite a shortfall of money in the Compensation Fund, the Centre is constitutionally obligated to meet states’ compensation requirement for a period of five years.

Various measures have been suggested to address the issue of shortfall in the Fund, either by reducing the compensation payable to states (which would require Parliament to amend the Act following GST Council’s recommendation) or by supplementing the funds available with Centre for providing compensation to states. The Act allows the GST Council to recommend other funding mechanisms/ amounts for credit into the Compensation Fund. For example, one of the measures proposed for meeting the shortfall involves Centre using market borrowings to pay compensation to states, with the idea that these borrowings will be repaid with the help of future cess collections. To enable this, the GST Council may recommend to Centre that the compensation cess be levied for a period beyond five years, i.e. post June 2022.

Impact on states post 2022

In 2019-20, except for a few north-eastern states, most states saw their compensation requirements increase multifold by 2-3 times, over the previous year’s figures. Table 1 shows the compensation requirement of states for the years 2018-19 and 2019-20. Six states (Delhi, Gujarat, Karnataka, Maharashtra, Punjab, and Tamil Nadu) accounted for 52% of the total requirement of compensation for 2019-20. Further, in some states such as Punjab and Delhi, compensation grants form a significant share of the overall revenue receipts (20% and 16% resepctively).

Note that states have been guaranteed compensation only for a period of five years. After June 2022, states dependent on compensation will observe a revenue gap due to a cut in these grants coming from Centre. States have roughly two years to bridge this gap with other tax and non-tax sources to avoid a potential loss of revenue, and a consequent fall in the size of their state budget, which could adversely affect the economy. To what extent will such concerns be alleviated remains to be seen based on the course of action decided by the GST Council.

Table 1: GST compensation requirement of states for 2018-19 and 2019-20 (in Rs crore)

State	2018-19		2019-20		% increase in compensation requirement
State	Amount	As a % of revenue	Amount	As a % of revenue*	% increase in compensation requirement
Andhra Pradesh	0	-	3,028	3%	-
Assam	455	1%	1,284	1%	182%
Bihar	2,798	2%	5,464	4%	95%
Chhattisgarh	2,592	4%	4,521	7%	74%
Delhi	5,185	12%	8,424	16%	62%
Goa	502	5%	1,093	9%	118%
Gujarat	7,227	5%	14,801	10%	105%
Haryana	3,916	6%	6,617	10%	69%
Himachal Pradesh	1,935	6%	2,477	8%	28%
Jammu and Kashmir	1,667	3%	3,281	5%	97%
Jharkhand	1,098	2%	2,219	4%	102%
Karnataka	12,465	8%	18,628	11%	49%
Kerala	3,532	4%	8,111	9%	130%
Madhya Pradesh	3,302	3%	6,538	4%	98%
Maharashtra	9,363	3%	19,233	7%	105%
Meghalaya	66	1%	157	2%	138%
Odisha	3,785	4%	5,122	5%	35%
Punjab	8,239	13%	12,187	20%	48%
Rajasthan	2,280	2%	6,710	5%	194%
Tamil Nadu	4,824	3%	12,305	7%	155%
Telangana	0	-	3,054	3%	-
Tripura	172	1%	293	3%	70%
Uttar Pradesh	0	-	9,123	3%	-
Uttarakhand	2,442	8%	3,375	11%	38%
West Bengal	2,615	2%	6,200	4%	137%

Note: Arunachal Pradesh, Manipur, Mizoram, Nagaland, and Sikkim did not require any compensation in 2018-19 and 2019-20.

*Revenue for the year 2019-20 does not takes into account those GST compensation grants which were payable to states in 2019-20 but were released by Centre in the year 2020-21. The percentage figures would be slightly lower if such grants are included in 2019-20 revenue.

Sources: State Budget Documents; Ministry of Finance; Lok Sabha Questions; CAG; PRS.

Mahatma Gandhi National Rural Employment Guarantee Act: Review of implementation

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