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Fiscal Federalism in Covid-19

How has fiscal federalism helped in Covid-19?

1. The Central government has adopted ‘Cooperative Federalism’ to fight the battle against Covid-19.

2. The Centre and the States have acted together to limit the human and economic impact of the pandemic.

3. The lockdown and social distancing measures had led to a near halt in the economic activities.

4. Through various measures, the Centre made sufficient resources available to the states to fight the contagion and spur economic activities.

Why did the government enhance borrowing limits of states?

1. Borrowing by States is governed by the provisions of Article 293 of the Constitution.

2. To help ease stress in State Finances, avoid a severe cutback in capital expenditure, and prevent a contractionary fiscal impulse, the Government has enhanced the borrowing limits of States for fiscal 2020-21 by 2% of GSDP.

3. Part of the enhanced borrowing limits were tied to four citizen-centric reform:

a. One Nation One Ration Card

b. Ease of doing business

c. Power sector

d. Urban Local Bodies

What are steps taken by the Government for better finance management in the Pandemic?

Way and Means Advances

1. It is a mechanism used by RBI under its credit policy to States, banking with it, to help them tide over temporary mismatches in the cash flow of their receipts and payments.

2. On the request of the Centre and the States, RBI increased the WMA limits of States by 60% which gave immediate liquidity to borrow short-term funds at lower interest rates.

Notified Disaster Declaration & Relaxation of SRDF Norms

1. It has been constituted under Disaster Management Act, 2005.

2. The Government of India treated Covid-19 as a notified disaster.

3. State Governments could spend SDRF on quarantine related measures, procurement of essential equipment, providing food, clothing, medical care, etc.

Financial Assistance to States: A scheme of Financial Assistance to States for capital expenditure was announced with an outlay of Rs 12,000 crore.

Special window for borrowings

1. Due to economic slowdown, there was a shortfall in the GST Compensation Fund.

2. So the central government set up a special window to borrow the shortfall amount on behalf of the States.

Maintaining Tax Devolution to States

1. The 15th Finance Commission recommended 41% vertical tax devolution in the Central divisible pool.

2. During the period 2021-21 despite a sharp decline in Union’s gross tax collection, the Union Government continued to devolve taxes on the basis of the budget estimates.

Conclusion

1. Despite dwindling resources due to the pandemic, the Centre empowered the States fiscally to fight the pandemic and stimulate economic recovery.

2. Besides taking care of our people, the country has provided critical medicines, vaccines, diagnostic kits, etc. to over 150 countries.

3. In the collective fight against the virus, the country has exhibited a new vigour in cooperative federalism and devolved governance.