As per the estimates from India Ratings and Research, a well-known credit rating agency, the lockdown imposed in response to the COVID-19 pandemic has led to a staggering loss of about Rs 97,100 crore in revenues across 21 major states for the month of April.
This enormous loss comes as a result of significant disruptions in various sectors including production, supply chains, trade, aviation, tourism, hotels, and hospitality. The unprecedented speed and scale of these disruptions mean that normal economic activity might not resume in the near future, even after the lockdown is lifted.
The Partial Functionality of Economy During Lockdown
During the lockdown, approximately 40% of the economy was functional as activities deemed essential were allowed to operate. This allowed for some amount of revenue to be generated despite the restrictions. However, this didn’t offset the overall revenue loss suffered by the states in April.
States whose revenue significantly relies on their own sources were particularly hard hit. For instance, states like Goa, Gujarat, Haryana, Karnataka, Kerala, Maharashtra, Tamil Nadu, and Telangana derive between 65% and 76% of their revenue from their own sources.
Central and State Governments’ Struggle with Dried-Up Cash Inflow
Both the Union government and State governments are grappling with the implications of dried-up cash inflow. However, states are in a more precarious situation due to the substantial expenditure incurred in battling the COVID-19 pandemic.
Uncertainty Surrounding States’ Receivables from Centre
The present circumstances pose a significant element of uncertainty regarding the quantum and timings of the states’ receivable funds from the Centre. With their own sources of revenue having fallen to alarmingly low levels, states are being compelled to resort to austerity measures while seeking new and more ways to generate revenues.
Austerity measures typically involve actions by a government aimed at reducing the amount of money it spends.
Possible Improvement in Revenue Generation
Despite the challenges, the situation might improve slightly in May 2020 due to the easing of some restrictions. For example, allowing the sale of liquor and raising the excise duty on it should provide some relief. Some states have also raised VAT on petrol and diesel to increase their revenue.
Sources of State Government Revenue
The main sources of state government revenue include States’ Own Tax Revenue (SOTR), Share in central taxes, States’ Own Non-Tax Revenue (SONTR) and grants from the Centre. The most substantial contributors to states’ own revenue are State Goods and Services Tax (SGST), State Value Added Tax (VAT) – mostly on petroleum products, State excise-mostly on liquor, stamps and registration fees, vehicle tax, tax and duty on electricity, and own non-tax revenue.
These challenging times have put the economic resilience of both central and state governments to the test, paving the way for innovative strategies and measures to ensure financial stability in the aftermath of the COVID-19 pandemic.
