September 8, 2020

The Government of India decision for non payout of GST to states owing to the shortfall of the revenue collection has made it clear that the state of Himachal Pradesh alongwith many others would be facing the brunt in the harshest manner. Though the centre is bound to pay for the losses as it is a constitutional obligation under the GST Act; for the BJP undermining the constitutional provisions is not a big deal.

The obvious reason cited for the non-payment is fall in the collection in GST. However, when the GST was introduced in the country and the powers of the state governments were usurped by the centre to levy indirect taxes, one of the persuasion to the states were that they will be adequately compensated for a period till 2020 with an increase of 14 per cent over the estimated revenue collections.

Experts state that in a situation where the GST revenues have fallen to Rs 2.35 lakh crore, the best way to compensate the states would have been to borrow money and fulfil the promise. However, the finance minister while refusing to transfer this money to the states has termed it as an act of God; and has been so reprehensible that she has asked the states to borrow instead.

Now what does it mean for a state like Himachal Pradesh whose major assets are either nationalized or the major sources of revenue have been taken over by the centre; these are the forests and the hydropower generation.

Impact on HP

Current Situation at hand

The Himachal Pradesh has already started feeling the heat of this decision and the state minister (BJP) in the GST council had even asked the Centre to compensate the state adequately. The option placed by the Centre is not just erroneous but also disastrous for the tiny state like Himachal Pradesh. The total liabilities of the state including public debt and other obligations has crossed Rs 50,000 crore(Rs 50,772.88 crore)and with such a huge debt to further borrow either from the RBI or from the market would turn the state into a mere adjunct of the financial institutions. There are numerous stories of the relationship between the money lenders and the recipients and invariably in all of them, the debtor is ruined. Shakespeare’s infamous play, “The Merchant of Venice” is a vivid remembrance of the reality of a debt trap. These neo-merchants advising to borrow loans to states i.e., the finance minister and the coterie should realise that once into the trap the states would never be able to come out of it.

Let us understand what the actual situation in the state is and how it is likely going to impact the people. After the shift from VAT to GST the state had visualised a revenue generation of Rs Rs 3,855.14 for the fiscal year 2020-21. This amounts to almost 42.41 per cent of the total tax revenue to the state. In the absence of this transfer from the Centre; and in a situation where since March the transfer has not been made it would seriously impact the fiscal health of the state.  The other major sources that the state envisioned in the budget proposal are from the excise duty in the state, mainly on the sale of liquor and on VAT. This is Rs 1,625.37 crore(19.67 per cent) and Rs 1,491.39(18.54 per cent) crore respectively for excise and VAT.  There has been a massive shortfall in all the three heads of state’s own revenue; state GST, excise and VAT due to the unilateral lockdown announced in the country since March 2020.

The hospitality industry one of the major sectors contributing to excise has been shattered. Similarly, the VAT revenues fell considerably. The only two sectors contributing to the state’s GST have been the production of cement and sale of cars in the state. However, owing to the lockdown there was little demand for cement as well. From March to June there was hardly any revenue even from these two sectors and it is only in July and August that nearly Rs 300 crore per month GST was generated in the state.

The state with a huge liability could survive with a revenue deficit grant as per the 15th Finance Commissions, but which is also going to end this year. This amounts to nearly Rs 11,400 crore.

How grave is the situation

“It is a grave situation,” commented a retired bureaucrat who was handling the financial department in the government for a long period. The salary component liability in the state for the year 2020-21 is Rs 44,545.05 crore, pensions-Rs 7,266 crore and interest payment on the loans borrowed is Rs 4,931.92 crore. These three combined together is 51.49 per cent of the total expenditure in the state; salaries-26.66 per cent, pensions- 14.79 per cent and interest payments- 10.04 per cent.

The total debt has already reached 42 per cent of the state’s GDP as the projected GDP of Rs 1,82,020 crore looks unachievable. Agriculture in the previous year showed a negative growth of 4 per cent and the major sectors contributing to the growth of the state’s economy were services and services. Both these have been severely hit in the state and hence the chances of generating revenue from these sectors are bleak. There is an estimated shortfall of nearly 20 per cent revenue in the state for the fiscal year 2020-21.

The fiscal deficit was estimated to rise from the budgeted 4.35 per cent to 6.42 per cent of the GSDP but with an alarming situation where the state has been asked to borrow more would make the situation worse for the state. The state may have to borrow nearly Rs 5,000 crore to ensure that it is at least able to disburse the salaries of its employees on time. Already a few departments like tourism and transport are unable to pay the salaries of its employees for the last three to four months.  It would mean an additional deficit of nearly 3.5 per cent of the GSDP.

The queries

Who is going to pay for the huge debt that the state is accruing? Or is it that the state government one fine day will say that it is ready to cut the salaries of its employees by a certain percentage as it is unable to disburse them!

The challenges hence faced by the state of Himachal Pradesh are beyond its capacity to resolve. The BJP government at the state instead of blindly accepting the ‘firmans’ of the centre should vociferously raise its voice and akin to the past must demand a ‘special category status’ to the state. Along with other states’ like Kerala, Rajasthan, Maharashtra the state of Himachal Pradesh should raise its voice against the GST dictum and ask the centre to deliver according to the Act. As the government in office is a mere custodian the owners of the rights of the state and its interests are the people. Governments come and go, the interests of the state and its people are supreme!

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