The fight against the pandemic is not over for the Indian government and the people, as the second wave of covid-19 in April reached a high of 2,37,03,665 total cases and 3,62,727 new cases per day with a death toll of 2,58,317 (on 13th May 2021). The central government expects the emergence of the virus again; hence they are working in collaboration with the state government to handle the pandemic and escape any further upcoming waves. On the state level, it was witnessed that Maharashtra alone was contributing to more than 60% of daily cases and has started to proceed to its declining stage, which alone had the biggest impact on the national curve. An unexpected surge in the cases reported by Karnataka and Kerala is alarming, but it is expected that the threat is not expected to sustain over a long period.
What is the central government doing?
To fight this battle of covid, the government has increased the deficit spending in the crisis ( in line with global trends). As a result, the fiscal deficit has reached 6.8 percent of GDP this fiscal year, far below the 3.0 percent target as laid by the Fiscal Responsibility and Budget Management Act (FRBM). The Government is focusing on financing this deficit through increased market borrowing of 54 percent in volume terms from pre-pandemic levels. In addition, the government is now planning to increase investment on medium-term priorities in public health, affordable housing, employment generation, support for small business, and development of the rural economy (comes after spending nearly 13 percent of GDP since the last march in Covid-related disaster relief). Total capital expenditure (Capex) is also scheduled to rise by almost 50 percent, to $71.3 billion, with coverage to defence roads and bridges, railroads, public works, and power to attract private and foreign investors to contribute to India’s long-term productive capacity. IMF report in its key policy responses (May 6, 2021) states that the central government’s fiscal support can be broadly classified as (i) above-the-line measures (which earlier focused on social protection and healthcare primarily) and (ii) below-the-line measures, which includes support to businesses and credit provision to several sectors (about 5.1 percent of GDP). Measures without an immediate direct bearing on the government’s deficit position aim primarily at credit support to businesses and poor households, especially migrants and farmers, with about 1.9 percent and 1.6 percent of the GDP, respectively.
The central government made an essential choice of not imposing new taxes and cesses on the revenue side and focusing on improving tax administration and collection. This has also helped India to make itself an attractive destination for foreign capital and also supports private investment and consumption to boost India’s recovery. The government is also focusing on completing long-overdue sales in 2021-22 (like Air India) to privatize state-owned assets which will be crucial for boosting India’s productive capacity. The sale of two public banks, consolidation of new Security Markets Code, creation of new Development Financial Institution and initiatives for supporting liquidity in the corporate bond market will help India facilitate foreign investment in business and infrastructure.
What is Happening at the State Level?
The state governments have taken a more conservative approach which is opposite to the central government in planning their budget this year. With the increased burden on state finances over the past year, the state government is more cautious than the centre in additional budgeting spending. The state government suffered more than the central government because of a shortfall in their share in central taxes. The borrowing limits have seen a sharp rise in central government borrowings which has limited the state to make additional borrowing through bonds as it can increase the yields. This will result in higher rates of borrowing for the government, which will worsen the scenario for the states’.
The state government has been the primary driver of public investments in the pre-covid era, their ability to fund Capex will be something that will directly affect India’s medium-term growth trajectory. With the pandemic at its peak the spending of states’ has been focused on healthcare and another area like education spending has seen fall at a time; educating the students will be an excellent resource for recovering from the pandemic shock. Most of the states have reduced spending on education which includes the states with poor learning outcomes, such as Odisha and Uttar Pradesh.
Should the Government Increase Spending further?
Although it is expected that the overall government expenditure is set to rise marginally by 1 % to Rs 348.3 lakh crore in 2021-22 and capital spending by 26.2 percent to Rs 5.5 lakh crore. There still are economists like Suvodeep Rakshit and Avijit Puri (both economists at Kotak institutional securities and Kotak Mahindra bank) who suggest that the government should focus on broadening the consumer base by empowering the lower and middle-income consumers. It is ideal, according to them, that most of the public spending should be directed towards sectors such as roads, railways, infrastructure, healthcare, and educational facilities to rebuild the economy. The government should also focus on quick approvals and timely payments to private operators.
With the cases slowly dropping, now it is the government’s responsibility to vaccinate as many people as possible to gradually reduce the surge of covid-19 and prevent any further hike in cases. There is a very crucial need for collaboration between the central government and the state government to beat the pandemic and to progress economically over a long period with immediate effects.