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On June 13, 2022, the West Bengal government passed a Bill to replace the Governor with the Chief Minister, as the Chancellor of 31 state public universities (such as Calcutta University, Jadavpur University). As per the All India Survey on Higher Education (2019-20), state public universities provide higher education to almost 85% of all students enrolled in higher education in India. In this blog, we discuss the role of the Governor in state public universities.
What is the role of the Chancellor in public universities?
State public universities are established through laws passed by state legislatures. In most laws the Governor has been designated as the Chancellor of these universities. The Chancellor functions as the head of public universities, and appoints the Vice-Chancellor of the university. Further, the Chancellor can declare invalid, any university proceeding which is not as per existing laws. In some states (such as Bihar, Gujarat, and Jharkhand), the Chancellor has the power to conduct inspections in the university. The Chancellor also presides over the convocation of the university, and confirms proposals for conferring honorary degrees. This is different in Telangana, where the Chancellor is appointed by the state government.
The Chancellor presides over the meetings of various university bodies (such as the Court/Senate of the university). The Court/Senate decides on matters of general policy related to the development of the university, such as: (i) establishing new university departments, (ii) conferring and withdrawing degrees and titles, and (iii) instituting fellowships.
The West Bengal University Laws (Amendment) Bill, 2022 designates the Chief Minister of West Bengal as the Chancellor of the 31 public universities in the state. Further, the Chief Minister (instead of the Governor) will be the head of these universities, and preside over the meetings of university bodies (such as Court/Senate).
Does the Governor have discretion in his capacity as Chancellor?
In 1997, the Supreme Court held that the Governor was not bound by the aid and advice of the Council of Ministers, while discharging duties of a separate statutory office (such as the Chancellor).
The Sarkaria and Puunchi Commission also dealt with the role of the Governor in educational institutions. Both Commissions concurred that while discharging statutory functions, the Governor is not legally bound by the aid and advice of the Council of Ministers. However, it may be advantageous for the Governor to consult the concerned Minister. The Sarkaria Commission recommended that state legislatures should avoid conferring statutory powers on the Governor, which were not envisaged by the Constitution. The Puunchi Commission observed that the role of Governor as the Chancellor may expose the office to controversies or public criticism. Hence, the role of the Governor should be restricted to constitutional provisions only. The Statement of Objects and Reasons of the West Bengal University Laws (Amendment) Bill, 2022 also mentions this recommendation given by the Puunchi Commission.
Recent developments
Recently, some states have taken steps to reduce the oversight of the Governor in state public universities. In April 2022, the Tamil Nadu Legislative Assembly passed two Bills, to transfer the power of appointing the Vice-Chancellor (in public universities) from the Governor, to the state government. As of June 8, 2022, these Bills have not received the Governor’s assent.
In 2021, Maharashtra amended the process to appoint the Vice Chancellor of state public universities. Prior to the amendment, a Search Committee forwarded a panel of at least five names to the Chancellor (who is the Governor). The Chancellor could then appoint one of the persons from the suggested panel as Vice-Chancellor, or ask for a fresh panel of names to be recommended. The 2021 amendment mandated the Search Committee to first forward the panel of names to the state government, which would recommend a panel of two names (from the original panel) to the Chancellor. The Chancellor must appoint one of the two names from the panel as Vice-Chancellor within thirty days. As per the amendment, the Chancellor has no option of asking for a fresh panel of names to be recommended.
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.