New Delhi: The world’s worst coronavirus outbreak is already set to stretch tight budgets states, making borrowing more expensive when they need money to amortize their savings.
India’s 28 states will have to pay around $ 5 billion or more in vaccination costs after Prime Minister Narendra Modi’s federal government suddenly made them responsible for vaccinating most adults from May 1. , their options for dealing with the additional spending are limited to reducing capital spending, selling public assets and increasing borrowing.
A simple calculation shows that it will cost states 354 billion rupees ($ 4.8 billion) to administer two vaccines to approximately 590 million Indians between the ages of 18 and 44, at a combined cost of 600 rupees per person. If vaccinations are extended to those under 18, the expenditure could reach 0.25% of gross domestic product, or about $ 7 billion, according to Emkay Global Financial Services Ltd. economist Madhavi Arora.
The additional burden could not have come at a worse time for states, which face higher yields on market borrowing this year, under the threat of widening budget deficits.
Failure of Indian provinces to raise and spend enough money may hamper recovery recession Last year. Indeed, states account for 60% of total government spending on asset creation and infrastructure construction, which drives job creation and consumption.
In addition, the provinces have difficulty attracting foreign investors despite generally higher yields than the federal government debt. Global funds only used 1.2% of 676 billion rupees investment limit available to them in notes issued by states as of May 10, up from 4.8% two years ago, according to data from the Clearing Corp. of India Ltd.
“Finances are bound to be affected,” said TS Singh Deo, Minister of Health and Commercial Taxation of the State of Chhattisgarh, in central India. “The ax will certainly fall on capital spending.”
Modi’s government encouraged states to sell assets to fund current year’s spending plans. It’s a way to reduce the debt burden, said Palanivel Thiaga Rajan, former Wall Street banker and newly appointed finance minister for the southern state of Tamil Nadu.
“Everything is on the table,” he said. “We’re going to cut a lot of spending that we don’t think is essential during this time. We will try to find new sources of funding. We will try to restructure the debt. We will look at asset sales. “
The pandemic has dramatically altered state budgets, according to the central bank. The average gross deficit of states that presented their budgets before Covid was 2.4% of production, while after the lockdown it was 4.6% in the year ended in March, said the Reserve Bank of India.
Uttar Pradesh, India’s most populous state, saw the gap widen to 4.17% of state GDP in the year ended March 31, from the prescribed limit of 3%. Bihar, among the poorest provinces in the country, estimated the gap at nearly 7%.
They may miss their goal of closing the budget gap this year. While there is no national lockdown this time around to stem the deadly second wave of the pandemic, several states have imposed restrictions on local movements that hurt economic activity and income collection. This is causing many economists to lower their double-digit growth forecasts for the current fiscal year.
There is “renewed uncertainty about the near-term economic outlook,” said economists led by Aditi Nayar at ICRA Ltd, the local rating arm of Moody’s Investors Service. This “may modestly limit indirect tax collections from these particular states.”
To bridge the gap, the state of Rajasthan in western India is considering selling or renting unused properties. Southern state Telangana plans to sell plots of land to raise around Rs 145 billion, local officials say media reports.
However, there is no guarantee that these agreements will succeed. Even the federal government has failed to meet divestment targets over the past two years after failing to sell the national airline Air India Ltd. and Bharat Petroleum Corp., a state-owned petroleum refiner. These sales have been carried over to the current year.
The state of Punjab in northern India is planning to cut capital spending and increase healthcare spending instead, its finance minister Manpreet Singh Badal said.
“States must fend for themselves,” he said. “Even though we have increased our health budget by 18% this year, I see my health budget still increasing due to this emergency. There is no other way. “
– With the help of Karthikeyan Sundaram, Siddhartha Singh and Kartik Goyal. – Bloomberg
Also read: The other vaccine mess in India: Modi’s government lost hundreds of crores on faulty shots for cows in 2019/20
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