After Prime Minister Narendra Modi‘s federal government abruptly made them liable for immunising most adults beginning May 1, India’s 28 states will be forced to pay $5 billion or more in vaccination costs. Since they had not budgeted for the jabs or measures to combat a second wave, their options for meeting the increased cost were limited to reducing capital spending, selling public assets, and increasing borrowing.
A simple estimate shows that states would spend 354 billion rupees ($4.8 billion) to provide two vaccine shots to approximately 590 million Indians aged 18 to 44, at a cost of 600 rupees per male. According to Emkay Global Financial Services Ltd. economist Madhavi Arora, if vaccines are expanded to those under the age of 18, the cost could increase to 0.25 percent of GDP, or around $7 billion. The additional burden could not have come at a worse time for governments, which are already facing higher yields on market borrowings this year due to the danger of widening fiscal deficits.
Failure of India‘s provinces to collect and invest enough money risks stalling the country’s recovery from a rare recession last year. This is due to the fact that states account for 60% of total government spending on asset creation and infrastructure development, both of which drive job creation and consumption.
Furthermore, despite paying yields that are traditionally higher than those on federal government debt, provinces are having trouble attracting foreign investors. According to data from the Clearing Corp. of India Ltd., global funds used just 1.2 percent of the 676-billion-rupee investment cap available to them in notes issued by states as of May 10, down from 4.8 percent two years ago.
According to the central bank, the pandemic has had a huge impact on state budgets. According to the Reserve Bank of India, the average gross deficit for states that presented their budgets prior to Covid was 2.4 percent of output, while after the lockdown it stood at 4.6 percent in the fiscal year ended in March. Modi’s administration also urged states to sell properties in order to finance current-year budget plans. That is one way to reduce debt, according to Palanivel Thiaga Rajan, an ex-Wall Street banker and newly named finance minister of Tamil Nadu in the southern state of Tamil Nadu.
The difference in Uttar Pradesh, India’s most populous state, widened to 4.17 percent of the state’s GDP in the fiscal year ended March 31, compared to the prescribed cap of 3 percent. Bihar, one of the poorest provinces in the country, measured the disparity at nearly 7%.There’s “renewed uncertainty regarding the near-term economic outlook,” said economists led by Aditi Nayar at ICRA Ltd, the local rating arm of Moody’s Investors Service. That “may modestly constrain the indirect tax collections of those particular states.”
To plug the gap, the western Indian state of Rajasthan intends to sell or lease unused lands. According to local media reports, Telangana, a southern state, plans to sell land parcels to raise approximately 145 billion rupees. However, there is no guarantee that these transactions will be completed. Even the federal government has struggled to meet divestment goals over the past two years, having failed to sell the flag carrier Air India Ltd. and a state-owned oil refiner. These revenues have been rolled forward to the next fiscal year.