COVID Crisis: Could India impose Financial Emergency?

[Authored by: Mandar Garge, Apr 28, 2020]

The Indian Union government can, but in all probability, won't impose a Financial Emergency. Never in the history of India has a Financial Emergency (वित्तीय आपातकाल) been declared. 

What is a Financial Emergency? And what are its effects?

First a look at the different types of emergencies the Indian Constitution allows. There are basically three types of emergencies:

1. National Emergency (Article 352)
    - Imposed at: National level
    - By: The President of India
    - On recommendation of: The Union Government of India
    - Has been Imposed: 3 times (1962 China war | 1971 Pakistan war | 1975 Internal disturbance)

2. State Emergency (Article 354) (a.k.a: President's Rule)
    - Imposed at: State level
    - By: The President of India
    - On recommendation of: The Union Government of India
    - Has been Imposed: More than 120 times so far

3. Financial Emergency (Article 360)
    - Imposed at: National level
    - By: The President of India
    - On recommendation of: The Union Government of India
    - Has been Imposed: Never. But we had come very close to imposing it (1991 when India went bankrupt)

Article #360 of the Indian constitution allows the Central Govt. to recommend a Financial Emergency to the President to in case the country is facing an unprecedented financial crisis. The COVID-19 crisis indeed is a grave financial crisis. 

The Mechanics:

• The Central Govt. provides a recommendation to the President. The President issues an order to impose the emergency. 
• The Lok Sabha (LS) and Rajya Sabha (RS) have to pass this order within two months of its issuance (else it becomes void). 
• Once imposed, only the President can lift it. No approval is needed from LS or RS while lifting it. 
• There is no time limit on when President is supposed to lift it. He does so on the recommendation of the Central govt.

The Implications:

• Financial decisions of the entire country become unitary. This means the central government gets complete hold of the Financial budgeting, spending and approval of State level financial bills and decisions.
• The state financial decision making powers render ineffective for the duration of emergency.
• State governments can keep working on financial bills, but their approval can be done only by the President (upon recommendation from the central govt.)
• The President gets complete control over central and state government employees' salaries and allowances (including the Judiciary) during the period of emergency. The President can also reduce their salaries and allowance if deemed necessary.

Does current situation warrant a Financial Emergency?

Probably yes. The country's financial condition is extremely bad. Revenues have diminished significantly, almost stopped. Government is running out of money. The country needs continuous (monthly) revenue to run itself. 

• States revenues have completely halted because the industry is shut, transportation is shut, farming is ON, but the produce is going waste, consumer spending has come to a grinding halt. 
• E.g. Maharashtra's 2019 revenues were around 3.15 Lakh Crores. It has a deficit of 90,000 Cr already. 2020's estimates are yet to come in, but the impact is going to be severe. The state had allocated a 4% expenditure of its revenue for Health care for 2020. COVID has already consumed that spending.
• Lockdown: A report by HDFC bank stated that the lockdown is likely to shave off INR 10 L Cr in the first half of 2020 (That's a whopping 4% of India's GDP)
• Moreover the slump in economic activity is projected to affect India's "forecasted" GDP by another 3%.
• GST collection for March 2020 has dipped by 11% (Rs 97,597 Cr as against 1.07 L Cr in March 2019). April 2020 GST collection can dip further to Rs 80,000 Cr. May 2020 collections are likely to be Rs. 60,000 Cr.
• The COVID crisis has sucked significant and unexpectedly higher amount of Govt's money on medical treatment. Just the money spent by states on testing the their population is more than Rs 100 Cr. The Central government has released Rs 17,000 Cr to states for spending on PPE, Ventilators, kits etc.
• Additionally the Central government is releasing multiple relief packages (a recent one was Rs. 1.7 L Cr - to benefit the poor directly via Direct Cash Transfer to their Jan-dhan accounts).

In such a scenario, its absolutely necessary that the state governments completely stop unwanted and low-priority expenses immediately. There is a possibility that state governments that are politically misaligned with the central govt may not follow Center's directives and guidelines. 

In such a scenario the Central govt. may see wisdom in taking full charge of country's every single financial expenditure.

Can Current Central govt. impose a financial emergency?

Theoretically yes. In fact rather easily. The current, PM Modi-led NDA government has the numbers in LS. It can manage number in the RS. And it can make the President sign an order for rolling out the emergency. 

Would Central Govt. impose a financial emergency?

Very unlikely. Although current situation favors a financial emergency, the current Modi-led Union government will not impose it for the following reasons:

• It would not want to be seen as predatory and would prefer achieving fiscal prudence collaboratively.
• It seems that there is a good amount of coordination and harmony between the Central and State government's in prioritizing the spend on fighting COVID.
• The Central government's approach seems to be that of issuing formal guidelines, make the states tow the line. If they don't, the Home ministry seems to get into a a mode of persuasion. It has been seen that Union government has brought the most misaligned state of WB in line.
• In the video-conf meeting between the PM and the CMs held on 27th April, PM Modi stated that he would like states to decide how to handle extended lock-downs or its lifting up. Modi has expressed complete solidarity with states with high COVID numbers and extended Center's support. 
• Imposing an emergency would send a very negative signal to the already shaken foreign investors.

All in all, the Central government seems to be getting States to fall in line, and work cohesively to ensure that the spending is wise and only where necessary. It seems to be able to impose the same discipline as expected in a Financial Emergency, without actually imposing it. 

What we see currently is an excellent example of how unitedly and cohesively the Center and State governments are working to fight the virus, keeping politics aside at least for some time. Hopefully we never reach the stage of Financial Emergency.

[Authored by: Mandar Garge, Apr 28, 2020]