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.

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.

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.

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.

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.

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.

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.

Union Minister of Finance & Corporate Affairs Smt. Nirmala Sitharaman attended the 5th Annual Meeting of Board of Governors of New Development Bank through video-conference in New Delhi today.

The NDB was established by the BRICS countries (Brazil, Russia, India, China and South Africa) in 2014. The purpose of the Bank is to mobilise resources for infrastructure and sustainable development projects in BRICS and other emerging market economies and developing countries to complement the existing efforts of multilateral and regional financial institutions for global growth and development. NDB has so far approved 14 projects of India for an amount of $ 4,183 million.

The Economic Advisory Council of the Fifteenth Finance Commission will meet on 23-24 April, 2020. It will be an online meeting presided by Chairman of the 15th Finance Commission, Shri N. K. Singh and attended by all the Members and Senior Officials of the Finance Commission.

The new SDR allocation was supposed to provide all 189 members with new foreign exchange reserves with no conditions.

What’s the reason? Such a major liquidity injection could produce potentially costly side-effects if countries used the funds for “extraneous” purposes.

What is a Special Drawing Right (SDR)? The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves.

The value of the SDR is based on a basket of five currencies—the U.S. dollar, the euro, the Chinese renminbi, the Japanese yen, and the British pound sterling. So far SDR 204.2 billion (equivalent to about US$281 billion) have been allocated to members, including SDR 182.6 billion allocated in 2009 in the wake of the global financial crisis.

The role of the SDR: The SDR was created as a supplementary international reserve asset in the context of the Bretton Woods fixed exchange rate system. The SDR serves as the unit of account of the IMF and some other international organizations.

The SDR is neither a currency nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members. SDRs can be exchanged for these currencies.

Review: The SDR basket is reviewed every five years, or earlier if warranted, to ensure that the basket reflects the relative importance of currencies in the world’s trading and financial systems.

The reviews cover the key elements of the SDR method of valuation, including criteria and indicators used in selecting SDR basket currencies and the initial currency weights used in determining the amounts (number of units) of each currency in the SDR basket.

The theme of World Heritage Day 2020 is “Shared Culture’, ‘Shared heritage’ and ‘Shared responsibility”.

Key facts: There are a total of 38 heritage sites in India. India ranks sixth in the largest number of heritage sites in the world.

Background: In 1982, the International Council on Monuments and Sites (ICOMOS) announced, 18 April as the “World Heritage Day”, approved by the General Assembly of UNESCO in 1983, with the aim of enhancing awareness of the importance of the cultural heritage of humankind, and redouble efforts to protect and conserve the human heritage.

What is a World Heritage site? A World Heritage site is classified as a natural or man-made area or a structure that is of international importance, and a space which requires special protection.

These sites are officially recognised by the UN and the United Nations Educational Scientific and Cultural Organisation, also known as UNESCO. UNESCO believes that the sites classified as World Heritage are important for humanity, and they hold cultural and physical significance.

Key facts: The list is maintained by the international World Heritage Programme administered by the UNESCO World Heritage Committee, composed of 21 UNESCO member states which are elected by the General Assembly.

Each World Heritage Site remains part of the legal territory of the state wherein the site is located and UNESCO considers it in the interest of the international community to preserve each site.

To be selected, a World Heritage Site must be an already classified landmark, unique in some respect as a geographically and historically identifiable place having special cultural or physical significance.

The total estimated loss to global economic growth is pegged at $9 trillion — more than three times India’s GDP.

How is India tackling the situation? What will be its impact? Thanks to various measures by RBI and the government, while the rest of the world is certain to contract, India is hoping to be one of the few countries that expand their overall GDP, regardless of how small that increase may be.

RBI has so far made two rounds of policy announcements to counter the debilitating effects of the spread of Covid-19 on the Indian economy.

In the first round, the RBI mainly: Cut the repo rate and the reverse repo rate. Started Targeted Long Term Repo Operations (TLTROs).

In essence, through these measures in the first round, the RBI: Tried to provide regulatory forbearance (that is, greater leniency) in recognising non-performing assets. Tried to boost the liquidity in the financial system so that businesses do not starve of funds.

In the second round, the RBI has: Cut the reverse repo rate further by 25 basis points (100 basis points make up one full percentage point). The reverse repo rate now stands at 3.75 per cent while the repo rate is 4.40 per cent. Announced another TLTRO of Rs 50,000 crore but this time it has mandated that 50 per cent of this amount borrowed by the banks must go to small and mid-sized Non-Banking Financial Companies (NBFCs) and Micro Finance Institutions (MFIs).

All India financial institutions (AIFIs) such as the National Bank for Agriculture and Rural Development (NABARD), the Small Industries Development Bank of India (SIDBI) and the National Housing Bank (NHB), which borrow from the RBI and the market to extend credit to NBFCs and MFIs, will be provided “special refinance facilities for a total amount of Rs 50,000 crore” by the RBI.

More funding to state governments — under the Ways and Means Advances (WMA) facility — as they try to spend to mitigate the economic stress. In respect of all accounts for which lending institutions decide to grant moratorium or deferment, and which were standard as on March 1, 2020, the 90-day NPA norm shall exclude the moratorium period, i.e., there would an asset classification standstill for all such accounts from March 1, 2020 to May 31, 2020

To ensure that loans given to real estate projects, that are getting delayed due to the crisis, do not turn into NPAs, the RBI provided an extension of another year before they are recognised as NPAs.

Allowed Scheduled Commercial Banks to reduce their Liquidity Coverage Ratio from 100 per cent to 80 per cent with immediate effect. The LCR essentially mandates the amount of cash that a bank is required to keep with itself.

Implications of these measures: Cutting reverse repo more than the repo, and thereby increase the gap between the two rates: On the one hand, the RBI is incentivising banks to borrow from it at low rates and lend it forward to businesses, yet, on the other, it is disincentivising them from coming back and parking these funds with the RBI.

LTRO benefits: It provides more liquidity. More importantly, it also provides it targeted to those institutions that are most hit by the economic slowdown and, as such, most in need of funds to survive themselves and boost economic activity at the bottom of the pyramid (that is, the poorest customers). With reduced LCR, banks would have more cash to deal with.

Significance of this move: The increased limit comes at a time when government expenditure is expected to rise as it battles the fallout of a spreading Coronavirus. The availability of these funds will give government some room to undertake short term expenditure over and above its long term market borrowings.

What are Ways and Means Advances? They are temporary loan facilities provided by RBI to the government to enable it to meet temporary mismatches between revenue and expenditure. The government makes an interest payment to the central bank when it borrows money.

The rate of interest is the same as the repo rate, while the tenure is three months. The limits for WMA are mutually decided by the RBI and the Government of India.

They aren’t a source of finance per se. Section 17(5) of the RBI Act, 1934 authorises the central bank to lend to the Centre and state governments subject to their being repayable “not later than three months from the date of the making of the advance”.

Background: The WMA scheme for the Central Government was introduced on April 1, 1997, after putting an end to the four-decade old system of adhoc (temporary) Treasury Bills to finance the Central Government deficit.

What if the government needs extra money for extra time? When the WMA limit is crossed the government takes recourse to overdrafts, which are not allowed beyond 10 consecutive working days. The interest rate on overdrafts would be 2 percent more than the repo rate.

Types of WMA: There are two types of Ways and Means Advances — normal and special. Special WMA or Special Drawing Facility is provided against the collateral of the government securities held by the state. After the state has exhausted the limit of SDF, it gets normal WMA. The interest rate for SDF is one percentage point less than the repo rate. The number of loans under normal WMA is based on a three-year average of actual revenue and capital expenditure of the state.

What are the existing WMA limits and overdraft conditions? For the Centre, the WMA limit during the first half of 2020-21 (April-September) has been fixed at Rs 120,000 crore. This is 60% higher than the Rs 75,000 crore limit for the same period of 2019-20. The limit for the second half of the last fiscal (October-March) was Rs 35,000 crore.

For the states, the aggregate WMA limit was Rs 32,225 crore till March 31, 2020. On April 1, the RBI announced a 30% hike in this limit, which has now been enhanced to 60%, taking it to Rs 51,560 crore. The higher limit will be valid till September 30.

The central bank, on April 7, also extended the period for which a state can be in overdraft from 14 to 21 consecutive working days, and from 36 to 50 working days during a quarter.

Union Agriculture Ministry has launched Kisan Rath Mobile App to facilitate transportation of foodgrains and perishables during lockdown.

The app is developed by the National Informatics Centre to facilitate farmers and traders in searching transport vehicles for movement of Agriculture and Horticulture produce.

The App will also facilitates traders in transportation of perishable commodities by Refrigerated vehicles.