The role of fiscal policy during economic recession is widely accepted for stabilizing the economy and creating stimulus. However, the policy to address the economic recession should be different than the policy addressing pandemic recession as argued by Romer (2021) and requires different policy responses for the following reasons. First, the objective of policy in an ordinary recession is to stimulate the aggregate demand, in general but a policy associated with pandemic is to stimulate the production and employment in a relatively safe manner as possible by not spreading the virus. Second, the impacts of these two different types of recession are different among different types of workers. Employment in the sectors like, hotel and restaurants, constructions, etc., are likely to be affected which could not be operational due to COVID restrictions unlike the sectors which could provide work from home. According to Romer (2021), fiscal policy during a pandemic should be specific to those who are directly affected rather than toward increasing aggregate demand more generally. The policy should aim at providing social insurances and should focus on other targeted aid.

We are in the second year of the pandemic and it is necessary to trace the fiscal policy response of the country. This article attempts to assess the fiscal position of the southern states and also attempts to assess the fiscal response of the states in terms of government expenditure as a result of pandemic. Since the state government does not enjoy the power of taxation, the policy response of the state government is expected on account of government expenditure. The period of study is from 2018-19 (normal year prior to pandemic) to                   2020-21.

Deficit position

Revenue deficit (RD) which is the gap between revenue expenditure and receipts have experienced an increase in all the states. RD increased from 2.7 per cent of GSDP in 2019-20 to 3.6 per cent of GSDP in 2020-21 in Andhra Pradesh. In Tamil Nadu it increased from 1.6 percent during 2019-20 to 3.2 per cent of GSDP in 2020-21. In Kerala RD as per cent of GSDP increased from 1.7 per cent in 2019-20 to 2.8 per cent in 2020-21. In Telangana, it increased to 1.9 percent during 2020-21 from 0.4 per cent during 2019-20 and Karnataka also experienced a revenue deficit of 1 per cent of GSDP during 2020-21 from revenue surplus of 06 percent of GSDP during 2019-20.

Fiscal deficit (FD) as per cent of GSDP also increased following the pandemic but it is below the increased upper ceiling of 5 per cent of GSDP for 2020-21 for all the states except Andhra Pradesh. In 2020-21, FD as per cent of GSDP is highest in Andhra Pradesh (5.6 %), followed by Tamil Nadu (4.8 %), Telangana (4.7%), Kerala (4.6 %) and Karnataka (3.9 %).

Figure 1: Fiscal Deficit as percentage of GSDP

Source: Computed from State Accounts Report, Comptroller and Auditor General of India and various state budgets

The rise in fiscal deficit can be attributed to the rise in state government expenditure along with a fall in state's own tax revenue and non-tax revenue.

State own tax and non-tax revenue

State own tax revenue (SOTR) which includes SGST, agricultural income tax, land revenue, stamps and registration, state excise, sales tax, vehicle taxes, electricity taxes and duties indicates a declines as per cent of GSDP from 2019-20 onwards for all the states. Similarly, state own non-tax revenue (SONTR) which includes interest, dividends, profits, lotteries, police, forestry and wildlife, etc is also showing a decline as per cent of GSDP since 2019-20 in all the states.

SOTR as per cent of GSDP is highest in Telangana (6.8%) in 2020-21, followed by Andhra Pradesh (5.8%), Karnataka (5.8%), Kerala (5.5%) and Tamil Nadu (5.0%). Kerala (0.78%) has the highest SONTR as per cent of GSDP as per 2020-21 among other southern states.

Table 1. State own tax and non-tax revenue  as percentage to GSDP (%)

Source: Computed from State Accounts Report, Comptroller and Auditor General of India and various state budgets

Government expenditure and total revenue

The pandemic shock have led to an increase in total expenditure of the state government to combat the disease with highest growth of 25 per cent experienced in Kerala, 12.8 per cent growth in Andhra Pradesh, 11.6 per cent growth in Tamil Nadu, 7.4 per cent growth in Telangana and 5.6 per cent growth is observed in Karnataka during 2020-21. The increase in total expenditure of the state government is on account of increase in both revenue and capital expenditure of the state. The data on revenue expenditure (RE), capital expenditure (CE), total expenditure (TE), revenue receipts (RR), share in central taxes (SCT), grants and non-debt capital receipts (NDCR) as per cent of GSDP is given below in table 2. The absolute numbers are given in table A (Appendix A).

Table 2. Government expenditure and revenue as percentage of GSDP of southern states