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Last week, the Assam Legislative Assembly passed the Assam Cattle Preservation Bill, 2021. The Bill seeks to regulate the slaughter and transportation of cattle and the sale of beef. It replaces the Assam Cattle Preservation Act, 1950, which only provided for restrictions on cattle slaughter. In this post, we examine the Bill and compare it with other state laws on cattle preservation. For a detailed analysis of the Bill, see here.
Cattle preservation under the Bill
The Bill prohibits the slaughter of cows of all ages. Bulls and bullocks, on the other hand, may be slaughtered if they are: (i) over 14 years of age, or (ii) permanently incapacitated due to accidental injury or deformity. Inter-state and intra-state transport of cattle is allowed only for agricultural or animal husbandry purposes. This requires a permit from the competent authority (to be appointed by the state government). Further, the Bill allows the sale of beef and beef products only at certain locations as permitted by the competent authority. No permission for such sale will be granted in areas that are predominantly inhabited by Hindu, Jain, Sikh and other non-beef eating communities, or within a five-kilometre radius of a temple or other Hindu religious institution.
Provisions of the Bill may raise certain issues which we discuss below.
Undue restriction on cattle transport in the north-eastern region of India
The Bill prohibits the transport of cattle from one state to another (or another country) through Assam, except with a permit that such transport is for agricultural or animal husbandry purposes. This may lead to difficulties in movement of cattle to the entire north-eastern region of India. First, the unique geographical location of Assam makes it an unavoidable transit state when moving goods to other north-eastern states. Second, it is unclear why Assam may disallow transit through it for any purposes other than agriculture or animal husbandry that are allowed in the origin and destination states. Note that the Madhya Pradesh Govansh Vadh Pratishedh Adhiniyam, 2004 provides for a separate permit called a transit permit for transporting cattle through the state. Such permit is for the act of transport, without any conditions as to the purpose of transport.
Unrestricted outward transport of cattle to states that regulate slaughter differently from Assam
The Bill restricts the transport of cattle from Assam to any place outside Assam “where slaughter of cattle is not regulated by law”. This implies that cattle may be transported without any restrictions to places outside Assam where cattle slaughter is regulated by law. It is unclear whether this seeks to cover any kind of regulation of cattle slaughter, or only regulation that is similar to the regulation under this Bill. The rationale for restricting inter-state transport may be to pre-empt the possibility of cattle protected under the Bill being taken to other states for slaughter. If that is the intention, it is not clear why the Bill exempts states with any regulation for cattle slaughter from transport restrictions. Other states may not have similar restrictions on cattle slaughter as in the Bill. Note that other states such as Karnataka and Chhattisgarh restrict outgoing cattle transport without making any distinction between states that regulate cattle slaughter and those that do not.
Effective prohibition on sale of beef in Assam
The Bill prohibits the sale of beef within a five-kilometre radius of a temple (which means an area of about 78.5 square kilometres around a temple). This threshold may be overly restrictive. As per the 2011 census, the average town area in Assam is 5.89 square kilometres (sq km) and the average village area is 1.93 sq km. The three largest towns of Assam by area are: (i) Guwahati (219.1 sq km), (ii) Jorhat (53.5 sq km), and (iii) Dibrugarh (20.8 sq km). Hence, even if there is only one temple in the middle of a town, no town in Assam – except Guwahati – can have a beef shop within the town area. Similarly, if a village has even one temple, a beef shop cannot be set up in a large area encompassing several adjoining villages as well. In this manner, the Bill may end up completely prohibiting sale of beef in the entire state, instead of restricting it to certain places.
Note that certain states such as Gujarat, Rajasthan, Uttar Pradesh and Haryana completely prohibit the sale or purchase of beef within the state. However, they also completely prohibit the slaughter of cows, bulls and bullocks. This is not the case under the Bill, which only places a complete prohibition on slaughter of cows. Further, in places such as Delhi, municipal regulations prohibit the sale of meat (including beef) within 150 metres from a temple or other religious place. This minimum distance requirement does not apply at the time of renewal of license for selling meat if the religious place comes into existence after the grant of such license.
The prohibition on sale of beef in areas predominantly inhabited by communities identified based on religion or food habits (non-beef eating) may also have an unintended consequence. With the food typically consumed by a community becoming unavailable or available only in select locations, it may lead to the segregation of different communities into demarcated residential areas. As per the 2011 census, the population of Assam comprises roughly 61% Hindus, 34% Muslims, and 4% Christians.
Onerous requirement for the accused to pay maintenance cost of seized cattle
Cattle rearing is essentially an economic activity. Under the Bill, cattle may be seized by a police officer on the basis of suspicion that an offence has been or may be committed. Seized cattle may be handed over to a care institution, and the cost of its maintenance during trial will be recovered from such persons as prescribed by the state government through rules. Note that there is no time frame for completing a trial under the Bill. Thus, if the owner or transporter of seized cattle is made liable to pay its maintenance cost, they may be deprived of their source of livelihood for an indefinite period while at the same time incurring a cost.
Cattle preservation laws in other states
The Directive Principles of State Policy under the Constitution call upon the state to prohibit the slaughter of cows, calves, and other milch and draught cattle. Currently, more than 20 states have laws restricting the slaughter of cattle (cows, bulls, and bullocks) and buffaloes to various degrees. Table 1 below shows a comparison of such laws in select states of India. Notably, north-eastern states such as Arunachal Pradesh, Meghalaya, Mizoram and Nagaland do not have any law regulating cattle slaughter.
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.