The National Education Policy (NEP) 2020 was released on July 30, 2020. It will replace the National Policy on Education, 1986. Key recommendations of the NEP include: (i) redesigning the structure of school curriculum to incorporate early childhood care and education, (ii) curtailing dropouts for ensuring universal access to education, (iii) increasing gross enrolment in higher education to 50% by 2035, and (iv) improving research in higher education institutes by setting up a Research Foundation. In this blog, we examine the current status of education in the country in view of some of these recommendations made by the NEP.
Universal access to Education
The NEP states that the Right to Education Act, 2009 has been successful in achieving near universal enrolment in elementary education, however retaining children remains a challenge for the schooling system. As of 2015-16, Gross Enrolment Ratio was 56.2% at senior secondary level as compared to 99.2% at primary level. GER denotes enrolment as a percent of the population of corresponding age group. Further, it noted that the decline in GER is higher for certain socio-economically disadvantaged groups, based on: (i) gender identities (female, transgender persons), (ii) socio-cultural identities (scheduled castes, scheduled tribes), (iii) geographical identities (students from small villages and small towns), (iv) socio-economic identities (migrant communities and low income households), and (v) disabilities. In the table below, we detail the GER in school education across: (i) gender, and (ii) socio-cultural identities.
Table 1: GER in school education for different gender and social groups (2015-16)
|
Level |
Male |
Female |
SC |
ST |
All |
|
Primary (I-V) |
97.9% |
100.7% |
110.9% |
106.7% |
99.2% |
|
Upper Primary (VI-VIII) |
88.7% |
97.6% |
102.4% |
96.7% |
92.8% |
|
Secondary (IX-X) |
79.2% |
81% |
85.3% |
74.5% |
80% |
|
Senior Secondary (XI-XII) |
56% |
56.4% |
56.8% |
43.1% |
56.2% |
Sources: Educational Statistics at Glance 2018, MHRD; PRS.
Data for all groups indicates decline in GER as we move from primary to senior secondary for all groups. This decline is particularly high in case of Scheduled Tribes. Further, we analyse the reason for dropping out from school education. Data suggests that the most prominent reason for dropping out was: engagement in domestic activities (for girls) and engagement in economic activities (for boys).
Table 2: Major reasons for dropping out (Class 1-12) for 2015-16
|
Reason for dropping out |
Male |
Female |
|
Child not interested in studies |
23.8% |
15.6% |
|
Financial Constraints |
23.7% |
15.2% |
|
Engage in Domestic Activities |
4.8% |
29.7% |
|
Engage in Economic Activities |
31.0% |
4.9% |
|
School is far off |
0.5% |
3.4% |
|
Unable to cop-up with studies |
5.4% |
4.6% |
|
Completed desired level/ Class |
5.7% |
6.5% |
|
Marriage |
|
13.9% |
|
Other reasons |
5.1% |
6.2% |
Note: Other reasons include: (i) timings of educational Institution not suitable, (ii) language/medium of Instruction used unfamiliar, (iii) inadequate number of teachers, (iv) quality of teachers not satisfactory, (v) unfriendly atmosphere at school. For girl students, other reasons also include: (i) non-availability of female teachers, (ii) non-availability of girl’s toilet.
Sources: Educational Statistics at Glance 2018, MHRD; PRS.
The NEP recommends strengthening of existing schemes and policies which are targeted for such socio-economically disadvantaged groups (for instance, schemes for free bicycles for girls or scholarships) to tackle dropouts. Further, it recommends setting up special education zones in areas with significant proportion of such disadvantaged groups. A gender inclusion fund should also be setup to assist female and transgender students in getting access to education.
Increasing GER in Higher Education to 50% by 2035
The NEP aims to increase the GER in higher education to 50% by 2035. As of 2018-19, the GER in higher education in the country stood at 26.3%. Figure 2 shows the trend of GER in higher education over the last few years. Note that the annual growth rate of GER in higher education in the last few years has been around 2%.
Figure 1: GER in Higher Education (2014-15 to 2018-19)
Sources: All India Survey on Higher Education, MHRD; PRS.
Table 3: Comparison of GER (higher education) with other countries
|
Country |
GER (2017-18) |
|
India |
25% |
|
Brazil |
51% |
|
China |
49% |
|
Indonesia |
36% |
|
South Africa |
22% |
|
Pakistan |
9% |
|
Germany |
70% |
|
France |
66% |
|
United Kingdom |
60% |
Sources: UNESCO; PRS.
The NEP recommends that for increasing GER, capacity of existing higher education institutes will have to be improved by restructuring and expanding existing institutes. It recommends that all institutes should aim to be large multidisciplinary institutes (with enrolments in thousands), and there should be one such institution in or near every district by 2030. Further, institutions should have the option to run open distance learning and online programmes to improve access to higher education.
Foundational literacy and numeracy
The NEP states that a large proportion of the students currently enrolled in elementary school have not attained foundational literacy and numeracy (the ability to read and understand basic text, and carry out basic addition and subtraction). It recommends that every child should attain foundational literacy and numeracy by grade three.
Table 4 highlights the results of the National Achievement Survey 2017 on the learning levels of students at Grade 3 in language and mathematics. The results of the survey suggest that only 57% students in Grade 3 are able to solve basic numeracy skills related to addition and subtraction.
Table 4: NAS results on learning level of Grade-3 students
|
Learning level (Grade 3) |
Percentage of students |
|
Ability to read small texts with comprehension (Language) |
68% |
|
Ability to read printed scripts on classroom walls such as poems, posters (Language) |
65% |
|
Solving simple daily life addition and subtraction problems with 3 digits (Mathematics) |
57% |
|
Analyses and applies the appropriate number operation in a situation (Mathematics) |
59% |
Sources: National Achievement Survey (2017) dashboard, NCERT; PRS.
To achieve universal foundational literacy and numeracy, the Policy recommends setting up a National Mission on Foundational Literacy and Numeracy under the MHRD. All state governments must prepare implementation plans to achieve these goals by 2025. A national repository of high-quality resources on foundational literacy and numeracy will be made available on government’s e-learning platform (DIKSHA). Other measures to be taken in this regard include: (i) filling teacher vacancies at the earliest, (ii) ensuring a pupil to teacher ratio of 30:1 for effective teaching, and (iii) training teachers to impart foundational literacy and numeracy.
Effective governance of schools
The Policy states that establishing primary schools in every habitation across the country has helped increase access to education. However, it has led to the development of schools with low number of students. The small size of schools makes it operationally and economically challenging to deploy teachers and critical physical resources (such as library books, sports equipment).
With respect to this observation, the distribution of schools by enrolment size can be seen in the table below. Note that, as of September 2016, more than 55% of primary schools in the country had an enrolment below 60 students.
Table 5: Distribution of schools by enrolment size
|
Strength (Grade) |
Below 30 |
31-60 |
61-90 |
91-120 |
121-150 |
151-200 |
More than 200 |
|
Primary schools (Class 1-5) |
28.0% |
27.5% |
16.0% |
10.3% |
6.3% |
5.6% |
6.4% |
|
Upper primary schools (Class 6-8) |
14.8% |
27.9% |
18.7% |
15.0% |
8.4% |
7.2% |
8.0% |
|
Upper primary schools (Class 1-8) |
5.7% |
11.6% |
13.0% |
12.1% |
10.4% |
13.4% |
33.8% |
Sources: Flash Statistics on School Education 2016-17, UDISE; PRS.
While nearly 80% primary schools had a library, only 1.5% schools had a librarian (as of September 2016). The availability of facilities is better in higher senior secondary schools as compared to primary or upper primary schools.
Table 6: Distribution of schools with access to physical facilities
|
Facilities |
Primary schools (Class 1-5) |
Upper primary schools (Class 1-8) |
Higher senior secondary |
|
Library |
79.8% |
88.0% |
94.4% |
|
Librarian |
1.5% |
4.5% |
34.4% |
|
Playground |
54.9% |
65.5% |
84.3% |
|
Functional computer |
4.4% |
25.2% |
46.0% |
|
Internet connection |
0.9% |
4.2% |
67.9% |
Sources: Flash Statistics on School Education 2016-17, UDISE; PRS.
To overcome the challenges associated with development of small schools, the NEP recommends grouping schools together to form a school complex. The school complex will consist of one secondary school and other schools, aanganwadis in a 5-10 km radius. This will ensure: (i) adequate number of teachers for all subjects in a school complex, (ii) adequate infrastructural resources, and (iii) effective governance of schools.
Restructuring of Higher Education Institutes
The NEP notes that the higher education ecosystem in the country is severely fragmented. The present complex nomenclature of higher education institutes (HEIs) in the country such as ‘deemed to be university’, ‘affiliating university’, ‘affiliating technical university', ‘unitary university’ shall be replaced simply by 'university'.
According to the All India Survey on Higher Education 2018-19, India has 993 universities, 39,931 colleges, and 10,725 stand-alone institutions (technical institutes such as polytechnics or teacher training institutes).
Table 7: Number of Universities in India according to different categories
|
Type of university |
Number of universities |
|
Central University |
46 |
|
Central Open University |
1 |
|
Institutes of National Importance |
127 |
|
State Public University |
371 |
|
Institution Under State Legislature Act |
5 |
|
State Open University |
14 |
|
State Private University |
304 |
|
State Private Open University |
1 |
|
Deemed University- Government |
34 |
|
Deemed University- Government Aided |
10 |
|
Deemed University- Private |
80 |
|
Total |
993 |
Sources: All India Survey on Higher Education 2018-19; PRS.
The NEP recommends that all HEIs should be restructured into three categories: (i) research universities focusing equally on research and teaching, (ii) teaching universities focusing primarily on teaching, and (iii) degree granting colleges primarily focused on undergraduate teaching. All such institutions will gradually move towards full autonomy - academic, administrative, and financial.
Setting up a National Research Foundation to boost research
The NEP states that investment on research and innovation in India, at only 0.69% of GDP, lags behind several other countries. India’s expenditure on research and development (R&D) in the last few years can be seen in the figure below. Note that the total investment on R&D in India as a proportion of GDP has been stagnant at around 0.7% of GDP. In 2018-19, the total expenditure on R&D in India was Rs 1,23,848 crore. Of this, Rs 72,732 crore (58%) of expenditure was by government, and the remaining (42%) was by private industry.
Figure 2: R&D Expenditure in India (2011-12 to 2018-19)
Sources: S&T Indicators Table 2019-20, Ministry of Science and Technology, March 2020; PRS.
Figure 3: Comparison of R&D expenditure in India with other countries (2017)
Sources: S&T Indicators Table 2019-20, Ministry of Science and Technology, March 2020; PRS.
To boost research, the NEP recommends setting up an independent National Research Foundation (NRF) for funding and facilitating quality research in India. The Foundation will act as a liaison between researchers and relevant branches of government as well as industry. Specialised institutions which currently fund research, such as the Department of Science and Technology, and the Indian Council of Medical Research, will continue to fund independent projects. The Foundation will collaborate with such agencies to avoid duplication.
Digital education
The NEP states that alternative modes of quality education should be developed when in-person education is not possible, as observed during the recent pandemic. Several interventions must be taken to ensure inclusive digital education such as: (i) developing two-way audio and video interfaces for holding online classes, and (ii) use of other channels such as television, radio, mass media in multiple languages to ensure reach of digital content where digital infrastructure is lacking.
In this context, we analyse: (i) the availability of computer and internet across households in India, and (ii) ability to use computer or internet by persons in the age group of 5-14. As of 2017-18, the access to internet and computer was relatively poor in rural areas. Only 4.4% of rural households have access to a computer (excludes smartphones), and nearly 15% have access to internet facility. Amongst urban households, 42% have access to internet.
Table 8: Access to Computer and Internet across households (2017-18)
|
Access to ICT |
Rural |
Urban |
Overall |
|
Households having computer |
4.4% |
23.4% |
10.7% |
|
Households having internet facility |
14.9% |
42.0% |
23.8% |
Note: Computer includes desktop, laptop, notebook, tablet. It does not include smartphone.
Sources: Household Social Consumption on Education (2017-18), Ministry of Statistics and Programme Implementation, July 2020; PRS.
Table 9: Ability to use Computer and Internet across persons in the age group 5-14 (2017-18)
|
Ability to use ICT |
Rural |
Urban |
Overall |
|
Ability to use computer |
5.1% |
21.3% |
9.1% |
|
Ability to use internet |
5.1% |
19.7% |
8.8% |
Note: Ability to use computer means to be able to carry out any of the tasks such as: (i) copying or moving a file/folder, (ii) sending emails, (iii) transferring files between a computer and other devices, among others. Ability to use internet means to be able to use the internet browser for website navigation, using e-mail or social networking applications.
Sources: Household Social Consumption on Education (2017-18), Ministry of Statistics and Programme Implementation, July 2020; PRS.
Public spending on education to be increased to 6% of GDP
The recommendation of increasing public spending on Education to 6% of GDP was first made by the National Policy on Education 1968 and reiterated by the 1986 Policy. NEP 2020 reaffirms the recommendation of increasing public spending on education to 6% of GDP. In 2017-18, the public spending on education (includes spending by centre and states) was budgeted at 4.43% of GDP.
Table 10: Public spending on Education (2013-2018)
|
Year |
Public expenditure (Rs crore) |
% of GDP |
|
2013-14 |
4,30,879 |
3.84% |
|
2014-15 |
5,06,849 |
4.07% |
|
2015-16 |
5,77,793 |
4.20% |
|
2016-17 |
6,64,265 |
4.32% |
|
2017-18 |
7,56,945 |
4.43% |
Sources: 312th Report, Standing Committee on Human Resource Development, March 2020; PRS.
Figure 4: Comparison of public spending on Education in India with other countries as % of GDP (2015)
Sources: Educational Statistics at Glance 2018, MHRD; PRS.
In the figure below, we look at the disparities within states in education spending. In 2020-21, states in India have allocated 15.7% of their budgeted expenditure towards education. States such as Delhi, Rajasthan, and Maharashtra have allocated more than 18% of their expenditure on Education for the year 2020-21. On the other hand, Telangana (7.4%), Andhra Pradesh (12.1%) and Punjab (12.3%) lack in spending on education, as compared to the average of states.
Figure 5: Budgeted allocation on Education (2020-21) by states in India
Note: AP is Andhra Pradesh, UP is Uttar Pradesh, HP is Himachal Pradesh and WB is West Bengal.
Sources: Analysis of various state budget documents; PRS.
For a detailed summary of the National Education Policy, see here.
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.
