Will approach Supreme Court to make centre pay states GST cess for COVID fight: Kerala FM Thomas Isaac

06 April, 2020

The COVID-19 pandemic is breaking the financial backbone of most of the state governments, which are facing rising expenditures and plunging revenues. At this difficult time, Kerala’s finance minister, the economist Thomas Isaac, told the independent senior journalist Anto T Joseph that the central government has not allotted any funds aside from the budgeted amounts to the states, nor has it allowed increased borrowing. The centre has given states “absolutely no additional money to fight the pandemic,” Isaac said. “It’s scandalous.” 

The states’ struggle is compounded by the centre’s delay in paying the Goods and Services Tax compensation cess, Isaac said. The cess was instituted to help states make up for any loss of revenue due to the implementation of the GST, from when the GST laws were enacted in 2017, for a period of five years. Isaac said that the Kerala government plans to approach the Supreme Court, to compel the centre to pay. The finance minister said he will approach other finance ministers to back his decision.

Anto T Joseph: State governments are facing a tough time with their reserves fast depleting. How much is the drop in revenues due to the lockdown, in your assessment?
Thomas Isaac: Under lockdown conditions, our revenues will be about twenty percent of the normal. There is no GST revenue in lockdown, understandably. Then, we have stopped the lottery. All liquor shops are closed in Kerala. [There is] no sale of motor vehicles. And land transactions are virtually nil.

Even if [the lockdown] is relaxed, I expect the revenues to be half the normal, in the coming three months. For one, lockdown is going to be staggered. Two, easing the lockdown doesn’t mean things are going to get back to normal. I do not know what is going to happen to all the small companies that have folded up. Sectors like tourism are not going to recover any time soon.

State governments have no choice but to spend [right now]. They may have to cut other developmental expenditure and spend on health. My budget for [medical supplies] is Rs 400 crore, which may have been raised by another Rs 100 crore [under normal circumstances]. But now, I have already authorised expenditure of Rs 600 crore for equipment, medicine and so on. It has overshot the entire budget by 50 percent in the first month itself. The government provides free treatment to COVID patients and spends up to Rs 25,000 for ventilator for each person who is isolated after confirming the disease. You need personal protection equipment [PPE] kits which health workers keep changing every four hours and so on and so forth. This is the level of expenditure—it’s really huge. These are unusual times, you can’t rely upon the normal health budget. 

ATJ: What has been the centre’s contribution so far?
TI: Let me put it this way: the centre has given no additional money because of COVID-19. Absolutely zero. What they have given us so far is the budgeted money through the National Health Mission fund and the GST arrears. They paid it in March-end. Now, the State Disaster Risk Management fund has been distributed. It can be spent for COVID also. Apart from these, which are all budgeted, there’s absolutely no additional money to fight the pandemic. It’s scandalous. I can’t imagine how people behave in this manner. 

ATJ: What are the options before the state governments?
TI: There are no options for them other than cutting expenditure, which is what some of the richest states in India have done. It will be calamitous. In this situation, we should not cut expenditure, and should in fact, increase it. In a slump, you have the spectacle of most states cutting the expenditure. That’s crazy. In fact, the additional payout [for COVID-19] is only 50 percent [of the package of Rs 1.7 lakh crore that the centre announced]. Rest is all budgeted money. What [the centre] is pumping in is only this 50 percent. That’s only Rs 70,000 to Rs 75,000 crore, a miniscule of their total expenditure.

All that the states can do is they front-load their borrowing and maintain the expenditure. Now, if we exhaust half of our borrowing, that’s permitted through the first two to three quarters, then what do you do for the rest of the months for paying salaries and so on? There are no solutions other than the centre taking states into partnerships. That’s very important.

Then, give the GST compensation cess. As per the law, we have to get the entire GST cess compensation. That’s something unavoidable. But the centre is postponing it. The law is very clear. Instead of dilly-dallying in this crucial juncture when states need money, the centre can allow additional borrowing to the states or borrow money itself and make it available to the GST cess fund. This is what [the former union finance minister] Arun Jaitley had promised. The money is very crucial. I fail to understand their [the centre’s] attitude. It’s very bureaucratic and offensive. They are distancing the states.

Second, the central revenues are  going down and hence transfers from the centre are also going to go down. So they should allow higher borrowing power for states. They should allow one percent more, by extending the existing three-percent limit of fiscal deficit on GSDP [gross state domestic product].

It is being done all over the world. The American stimulus package is ten percent of its GDP. Of course, their fiscal deficit is going to go up so much. If you do it this year, we can bring it down slowly in the next three years. People do understand.

ATJ: Have you spoken to other states about these issues? Tamil Nadu, too, has demanded a relaxation.
TI: I am writing to all state finance ministers to join a webinar [on this subject] that we are hosting in the third week of April, after the lockdown is over. We will also invite leading economists, academicians, bureaucrats and journalists to join the two-day non-stop live streaming. There will be some limitations for interaction with each session having five or so participants. Then there may be a dozen people permitted to ask questions, and taking [questions] on chat mode. The idea is to draw the public attention and initiate a national mainstream debate. It’s to tell the public what’s going on is silly.

ATJ: Are you planning to take this up with the GST Council?
TI: The council was to meet immediately after the Parliament session [which ended on 23 March] just to discuss GST compensation. Of course, you can’t have physical meetings now, only videoconferencing. But no intimation has come from them. 

It will be a major showdown. We have no option but to drag the issue to the Supreme Court under [Article 131], which discusses disputes between state and centre. One objective of the webinar is to ensure other state finance ministers come on board.

 ATJ: Kerala is among the states that are suffering a significant fall in revenue. How are you managing?
TI: In Kerala, we have just front-loaded all our borrowing. We are taking the first tranche of Rs 6,000 crore and will take another Rs 6,000 crore soon after [the festival] Vishu. These are borrowings from the RBI by way of SLR bonds. [Statutory Liquidity Ratio Bonds, or SLR bonds, are given against the ratio of the state’s liquid to its non-liquid funds.] Kerala is entitled to borrow Rs 25,000 crore by way of SLR bonds, a facility available to every state. With the two tranches, we are close to half of the entitlement.

This interview has been edited and condensed.

Correction: An earlier version of this interview mistakenly stated that Isaac said “the additional payout” announced by the centre for COVID-19 is only 50 percent of “the health budget.” He was, in fact, referring to it being 50 percent of the relief package announced by the centre, of Rs 1.7 lakh crore. The Caravan regrets the error.

Anto T Joseph is a Mumbai-based senior journalist and a British Chevening Scholar. He has worked with DNA, the Economic Times, The Guardian (UK) and the Deccan Chronicle Group as a writer, editor and columnist.