Once again, social media has gone frenzy over the Nagaland government’s decision to impose cess on fuel on account of COVID-19. The news has even made national headlines for being the first state in the country to levy COVID cess of Rs 5 per litre of diesel and Rs 6 per litre of petrol and other motor sprits. This cess is in addition to the prevailing state’s tax of 14.5% for diesel and 25% for petrol and other motor spirits. There is also an additional road maintenance cess of Rs 2 per litre on petroleum products. That makes the total cess on diesel at Rs 7 per litre and that of petrol at Rs 8 per litre. A cess is a type of tax that is charged or levied over and above the base tax liability of a taxpayer.
The move has been severely criticised by citizens and netizens alike on various socio-economic reasons. Many fear that the additional cess would lead to price escalation of essential goods, which are already high due to market disruptions following the economic lockdown. Some are annoyed and agitated by the perceived profiteering by the government during this pandemic. Some had even termed the COVID cess as tax terrorism. Informed consumers are of the view that the fall in the international prices of crude oil should be transferred to the consumers. Evidently, at times like this, any hike in price is not welcome, as many people are already having a hard time making ends met.
Why then would a popularly elected government choose to take such unduly, unpopular decision at the expense of ruining their repute and popularity? The answer could be more than simple arithmetic because no sensible government would take such tough decisions that hurt the people and the economy, unless they run out of options.
If we study the budget receipts and expenditure, as presented in the assembly by chief minister Neiphiu Rio, we find that the financial position of the state is in poor shape. The accumulated public debt of the state is estimated to be Rs 10,766 crore which is 39.7% of the gross domestic state product (GSDP) and over 50% of the current budget outlay. In addition, the fiscal deficit for the current fiscal is estimated to be Rs 2,465 crore which is over 9% of the GSDP. Considering the state’s resources, the fiscal deficit is abnormally high which could affect state’s ability to raise money in times of crisis like this.
Under the fiscal responsibility and budget management (FRBM) Act, the states are mandated to keep their fiscal deficit under 3% of their respective GSDP. The 14th Finance Commission has also reiterated the need to reduce fiscal deficit to 3% of GSDP and eliminate the revenue deficits, and insist on those criteria for states to avail additional borrowings.
A further look at the budget receipts reveals that 30% of the budget expenditure is financed from internal borrowings including ways and means advances (WMA) from the RBI, 42.6% from central assistance as grants and loans, 21.6% from state’s share in central tax, and only 6.16% from state’s own revenue. That means, out of an outlay of Rs 100, only Rs 6 could be generated internally. This puts the state in a very grim position, financially.
Now, because of the COVID-19 and the economic lockdown, the revenues of both the state and Union government will suffer a major blow and the revenue receipts will fall short of the targets by a substantial amount. In such an event, the receipts from the state’s own revenue, state’s share in central taxes and central assistance will fall. Because, without business activity, no government can raise sufficient resources. This would create huge budgetary deficits and states won’t be able to discharge its financial obligations, unless money is raised elsewhere.
However, it is not easy for a state like Nagaland to raise money internally. Under the current scenario, even the additional cess on fuel won’t generate much revenue because of the reduced fuel consumption. According to provisional data from the oil industry, fuel consumption in India fell by 64% for petrol and 61% for diesel during the first half of April 2020. Therefore, while the concerns of the public and various NGOs regarding the COVID cess are genuine, the state’s finances are also in precarious condition. And when the state coffers are empty, its spending ability would also be restricted.
The lockdown has put millions out of employment, and firms and companies have started to reduce the wages and salaries of its employees. Supply chains has been disrupted and many businesses has been pushed into hibernation. Some people have lost their job, their businesses and income. But for those who have started their business with borrowed capital, their burdens are even more complicated.
Amidst such situations, the state is obliged to come to the rescue of the suffering people, supply resources, provisions and medical equipment to different habitations, transfer money to those who have lost their livelihood and more importantly to rebuild the health infrastructure from scratch. So much of these was unforeseen expenses not reflected in the budget, yet somehow has to be expended. On the one hand, the state is confronted with mounting expenditure; on the other hand, a dwindling revenue. Yet, unlike the Union government, the state government cannot print currency to finance its expenses, nor grew money on trees.
Then, what are the options to raise money? There are three notable ways. First is through state’s own tax or non-tax revenue or through tax devolution from the center. Second is through borrowings, and third is through central or external grants and assistance. As is well known, the most preferred means of raising resources would be the grants-in-aid from the Central government. Because grants do not create liability nor incur costs to the consumers. But since all states are seeking for additional funds, we cannot set our hopes too high. The other option would be to raise revenue through taxes. But as the economic activity is on a standstill, revenue collection through tax would be minimal, and any effort to raise revenue through new or enhanced tax rates would be resisted, as is seen in the present scenario.
The last option would be borrowings. Taking cognizance of the situation, the RBI has decided to increase WMA limit by 30% from the existing limit for all states to enable them to tide over the situation arising out of the pandemic. Such measures are good news for a cash strapped state like Nagaland. However, indulging too much on borrowings will put a toll on the state’s finance and economy in the long run. Already, the state is spending 30% of its annual expenditure on debt servicing. That means less money is left for other developmental expenditures.
Therefore, if the budgetary shortfalls are not supplemented through generous grants from the Centre, the state will be in a precarious position to fight the pandemic, restore human lives and business activity. Meanwhile, the government must put in place strict austerity measures to curb avoidable expenditures. The government must also ensure that the state and its agencies, including the local and village bodies, judiciously utilize the funds allotted to combat the disease or alleviate human livelihoods. Government officials and community leaders must also take due diligence such that assistance meant for the poor and needy reach the most deserving individuals.
As for the general public, we must remain vigilant against the virus and corrupt practices; cooperate with the authorities and help them perform their duties well; abide the law, assist each other and encourage one another to do well and better. For tough times never last, tough people do.
(The author is an educator, researcher and an environmentalist. He has a Ph.D in economics from Nagaland University. Views expressed are his own. He can be reached at firstname.lastname@example.org)