Expert Speak India Matters
Published on Apr 02, 2020
COVID19: Tamil Nadu’s demand for fiscal grant can put centre in a fix

In a weekend letter to Prime Minister Narendra Modi, Tamil Nadu chief minister Edappadi K Palaniswami has sought a grant of 9,000 crore to the state to fight Covid 19. The letter comes only days after an earlier missive, seeking Rs 4,000 crore in central aid.

"Conventional economic doctrines and dogmas will need to be set aside temporarily," the chief minister said in his earlier letter. The observation was to support his accompanying request for a one-time relaxation of the three-percent upper-limit for deficit-financing. This, he sought, for fiscals 2019-20 and 2020-21.

The economic impact of the ‘Covid curfew’ was likely to be severe and unprecedented, the chief minister said. Such difficult times call for unconventional measures to ensure that the economy was revived and re-invigorated, he added. 

Aggregate funds

The chief minister suggested to the prime minister that the centre should provide an aggregate amount of at least one-lakh crore rupees for special grants to state governments in the wake of the Covid 19 crisis. "This must be in addition to other forms of financial transfers to the states under the union budget and can be financed by the centre from the RBI," he went on to suggest further.

Palanisami even had a ready-reckoner for distribution of such a fund, which the centre is to consider and create. According to him, the fund could be distributed in proportion to the size of each state's GSDP to the national GDP.

Additional borrowing

In a pragmatic way, the Tamil Nadu chief minister also wanted the centre to clear 33 percent additional borrowing over the existing permitted levels, to enable the states to meet the unexpected new expenditure on the virus front. He also wanted expeditious clearance of such proposals from states for going to the market with new bor new borrowings.

It is unclear if the Tamil Nadu government has already done its homework on the market-reception if the state were to go in with new bonds. At one-level, it is very likely that big-time investors may find government bonds the safest bet for an indeterminable future of volatile economic situation and fiscal consequences.

On the other hand, it is not wholly unlikely that those investors may decide also to sit tight on their cash-mounds, unsure about their own monetary demands, owing to the current covid crisis. It is also not unlikely that once the crisis is behind them, private corporates may be forced to to go to the market place, with a relatively more attractive package for investors.

Migrant labour

Palaniswami has also underlined the substantial expenditure required to strengthen healthcare infrastructure and medical supplies. Tamil Nadu being one of the high-risk states, his government commenced anti-virus activities early on. In some respect, the state government’s initiatives came before the centre sounded the full-alert, and Prime Minister Narendra Modi called for a day-long ‘Janata curfew’ and followed it up with the now ongoing, 21-day shutdown.

There are lessons in preparatory measures that other states and even the centre could pick up from the Tamil Nadu experience over the past weeks. However, Tamil Nadu too focussed more on the medical aspects of corona-threat thus far without looking at the social and economic impact – rather the economic impact on the society.

For instance, the state government too has mostly failed thus far to consider the problems of migrant labour and others who are all across the country. If there are migrant labour from some of the north and north-Indian states wanting to go back home, especially because there is no work and no income for them in their job-centres, it is equally true of Tamil migrant labour elsewhere in the country.

According to Tamil media reports, some 5,000 semi-skilled labourers engaged in the drilling of borewells all across the country are now stuck. They have appealed to the state government to facilitate their safe and early return home.

Despite the Union Home Ministry initiating disciplinary action against four senior officers of the Delhi state government, it is unfathomable how the authorities, including those at the centre, overlooked this key element in non-medical crisis-mitigation. All state governments, including that in Tamil Nadu, have had vast and varied experience in disaster related relief measures.

The first lessons in times of floods and cyclones is to house the affected parties in local school buildings and arrange for feeding them. Though the migrant labour numbers are high, a pre-planned programme could have helped them stay back in whichever town or village they were working at the time, to be housed and fed locally, until a clearer scheme was devised.

Possibly, the centre did not consider these aspects before the Prime Minister called for a 21-day lockdown. Nor was it possibly discussed in his discussions with chief ministers over video-conferencing a few days earlier. Today, in the absence of such an arrangement, migrant workers are found stuck on the Delhi-Uttar Pradesh border.

These migrants now not only run the risk of contracting Covid 19, but also passing it on to those others jostling for a seat in the buses deployed to take them home. The possibility of them passing on the disease, if any or many of them have already contracted it, to the local population where they have crowed, is also a distinct possibility. This, in a way, has defeated the very purpose of 21-day lockdown and may in the end end up being counterproductive. 

Greater resonance

Tamil Nadu has always been upfront when it came to asserting the rights of states and also their demands on the centre. Yet, none possibly expected chief minister Palaniswami to be as fast as he has been in writing to the prime minister even before the centre had possibly assessed the full gravity of the evolving situation.

In context, Palanisami is alredy talking about the economic impact of the Covid 19 crisis, more than the medial aspects of it, in his letters to Modi. “Eventually, measures will also have to be taken to revive economic growth, assist various sectors to return to their growth trajectory and to stimulate consumption and investment demand,” he said.

All governments, the chief minister told the prime minister “will suffer substantial reductions in tax and revenue receipts. It will not be possible to step up revenue-raising for a while. However, the expenditure needs, and responsibilities will not wait,” he pointed out, and rightly so.

Given that almost all states, independent of political affiliation, are sailing on the same boat as far as the pre-Covid 19 economic situation was concerned, the current fiscal pressures are going to mount even more for most of them. That being the case, sooner than possibly later, most, and possibly all state governments can be expected to knock at the centre’s doors, seeking grants and aid. The Tamil Nadu call will thus have greater resonance than is perceptible just now.

Markers, medians

The Centre may be happy to increase the fiscal deficit limits for states, as sought by the Tamil Nadu government. But that may be all about it, and issues remain. Here again, they may need to have a certain uniformity while clearing independent proposals from individual states.

One, it is unclear where from the centre, which is already under great fiscal stress, is going to find the money from. Even if the fiscal deficit limits are thrown out the window, and more currency is printed for distribution among states, the real benefit will be partially offset by the attendant inflationary pressures.

In the absence of demand, this could lead to stagflation or worse. At least, some minds in the union Finance Ministry, Niti Ayog and RBI are bound to think on those lines. Internal discourses of the kind could only delay help from reaching the states when badly needed.

Even if the centre is able to re-direct developmental funds to fight Covid 19, as it is bound to do even more, the bureaucracy may require time to fix yardstick for measuring the fiscal demand – and real requirement – of individual states. There are no markers and medians, for them to work with.

Unlike in the case of droughts and floods, there are no models for measuring the impact of Covid 19 on a state’s economy. This can become more problematic from the centre’s perspective than any other issue concerning extending funding to state governments in their fight against Covid 19.

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N. Sathiya Moorthy

N. Sathiya Moorthy

N. Sathiya Moorthy is a policy analyst and commentator based in Chennai.

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