Tuesday, November 30, 2021
 News Details
Covid Effects: Is Financial Emergency on cards?
Straight Talk

K B Jandial

Despite denial of Union Finance Minister and strong rebuttal by the PIB, the social media continued with a narrative that the financial emergency in India is not ruled out, another first of Modi Govt if ever it is imposed. It started with a tweet of Subramanian Swami on 21stMarch, 2020- “Is declaration of financial emergency becoming inevitable? Govt must put doubts to rest”- followed by an article, 'Narendra Modi Likely to Declare Financial Emergency in India’ by a young entrepreneur, Nitin Naresh in a little known magazine “Inventiva” which created a storm. His piece prophesied that the President may declare a state of financial emergency which went viral on social media forcing PIB to rubbish it as “malicious and fake” saying that “there is no such plan.”

Faced with trolls on social media & threat of FIR, Nitin tried to clarify that it was an opinion piece, alerting the people about this possibility so that they don’t encounter it unprepared as they did in case of demonetisation in 2016. Describing it a worst kind of financial crisis of independent India and PM Modi as ‘Khatron ke Khiladi”, Nitin clarified that he did not say that it will happen but “likely” to happen.

India’s economic condition in the backdrop of pandemic Covid-19 and nationwide lockdown is worrisome with Finance Minister and RBI announcing a slew of measures. including financial package of 1.70 lakh crore for the hard hit people and the sectors; Rs. 31000 crore for construction sector; increased wages under MGNREGA & ex-gratia payment to 30 million poor senior citizens along with insurance cover for frontline 2 million medical personnel; Rs. 15000 crore for immediate strengthening of the health infrastructure and procurement of PPEs & other items of protection to health workers & other COVID warriors. Besides, free cereals and cooking gas, cash through direct transfers for three months being provided to about 800 million people. Lakhs of labour & skilled workers kept in camps near State borders are being fed and all these things need resources which are under unprecedented stress with practically no revenue collection to augment State’s kitty.

As is evident, the Covid has a long lasting & frightening effect on the economy which might push India to unprecedented fiscal crisis leaving Modi Govt with no option but to go in for unusual measure, be it unpopular, to mop up resources to face the financial crisis. The Govt has already started this by freezing of DA & DR to employees & pensioners respectively from January to July 2021 that alone created a resource of about Rs. 85,000 crores. Thirty percent cut in the salary of the President, Vice President, PM, Union Ministers, MPs, Governors & Lt Governors and freezing of CDF of MPs for two years is a desperate action to cobble up resources. All these may not add up much to kitty but it does send a distress signal about the deteriorating fiscal conditions of the Govt. of India. Whether Financial Emergency is announced in one of Modi’s ‘8PM’ addresses to the nation or remains a speculation, it is still important to know what it is all this about.

The Constitution of India has vested special powers in the President of India to declare three types of emergencies.

1.National emergency- imposed due to war, external aggression or armed rebellion under Article 352; imposed during wars with China ( 26th October, 1962 – 10th January 1968) & Pakistan( 3rd December, 1971-21st March, 1972).

2. State emergency – imposed due to the failure of the constitutional machinery in a state, popularly known as ‘President Rule” under Article 356. It is used very often.

3. Financial Emergency- due to a threat to the financial stability under Article 360 but not yet imposed.

A state of emergency means the governance directly under the Central Govt with suspension of certain constitutional provisions. The breakdown of constitutional machinery in a State that facilitates President’s Rule under Article 356 has been used, albeit misused, very frequently. Punjab happened to be the first State of Independent India to come under President’s Rule as early as on 20th June, 1951 with Assembly kept under suspension. It lasted for 9 months & 28 days till State Congress got its acts together. Since then, this provision has been used 131 times, maximum ten times in Manipur followed by 9 times in J&K & UP States. Incidentally, the longest spell of President of six years and 264 days (19 Jan, 1990-9 Oct, 1996) was imposed in J&K.

The emergency declared on 25th June, 1975 under controversial circumstances of political instability using the earlier expression in Article 352 of “internal disturbance” following Allahabad High Court historic judgment in an election petition which unseated PM Indira Gandhi. The emergency lasted till 21st March 1977. By the Constitution (forty-fourth Amendment) Act, 1978 the words “internal distances” were substituted by “armed rebellion” to prevent its further misuse. It was initiated by Morarji Deasi led Janata Party Govt.

Article 360 empowers the President of India to declare by a Proclamation (of course, on recommendation of the Union Cabinet) Financial Emergency in the country if he is satisfied that a situation has arisen due to which the financial stability or credit of India or any part of its territory is threatened. During this emergency, the executive authority of the Union can give directions to any State to observe “such canons of financial propriety as specified in direction” and to give “such other directions as the President may deem necessary for the purpose”. All Money and Financial Bills shall be kept for the consideration of the President before these are passed by the State Legislature.

This provision also empowers the President to issue directions to the State or the Union for “reduction of salaries and allowances of all or any class of persons serving in connection with the affairs” of a State, or the Union including the Judges of the Supreme Court and the High Courts. Thus during this exigency, the Centre gets full control over States’ financial matters, which is considered a threat to the state's financial autonomy and federal structure.

Can the pension and the dearness relief (DR) of pensioners be reduced during Financial Emergency as of the serving employees? There is no mention of reduction in pension of retired employees of the Govt and retired Judges. On this issue, there is some difference of opinion among constitutional experts but majority of them are of the opinion that the salary and allowances mentioned in the sub clauses 3 (a)(i) and (b) doesn’t cover pensioners but only those who are “serving in connection with the affairs” of a State or the Union.

This provision was brought in by Dr. B R Ambedkar as draft Article 280A very late on 16 October, 1949 when the Constituent Assembly was doing second reading of the draft Constitution. He said that he was inspired by the USA’s National Recovery Act of 1933 to deal with aftereffects of the great economic depression. He justified it by saying since US Supreme Court had declared it as unconstitutional the President could hardly do anything to combat depression. In the event of similar financial & economic situation in India, he said, it was “better to make an express provision in the Constitution itself.” While Prof Shiban Lal Saxena wanted power to Parliament to make laws on the subjects in the State list, M V Kamath ridiculed it by saying that the President might consider deficit budgets as threat to financial stability. R K Sidhva countered it by saying that if he feels like this then he would not be worthy of this position. Pt Hirday Nath Kunzu cautioned against distrust to Provinces & treating then as children & the President as a village school Master. The Assembly finally ceded to the appeal of K N Munshi and approved the provision of Financial Emergency respecting the need for financial integrity without giving unbridled powers to the Centre.

In India, economic crisis of 1991 was the worst ever, which can hardly be compared with the present situation despite having projected zero growth due to lockdown. The 1991 crisis had roots in 1985 when India had landed in a twin deficit: trade balance ran into deficit with imports swelling on one hand and on the other, a large fiscal deficit. In January 1990, India was left with Foreign Exchange Reserves of US $ 1.2billion, which further depleted by half in June, 1990, hardly sufficient for three weeks’ of essential imports and weeks away from defaulting on its external balance of payment obligations. Chandrasekhar Government could not present the budget. With global credit-rating agencies downgrading India from investment grade making it impossible to even get short term loans.

At that time, the World Bank and IMF had stopped their assistance, leaving Indian Government with no option but to pledge 67 tons of gold with IMF, 47 tons of gold to Bank of England & 20 tons of gold to Union Bank of Switzerland and secured loan of $2.80 billion to avoid default on payments. Today’s situation is in no case as bad as of 1991. As compared to mere $1.2 billion Forex Reserves in 1991, it stood at US $ 479.57 billion on 25th April, 2020, perhaps highest ever.

While there is no ground for invoking Financial Emergency but some of the developments in financial and economic front following nationwide lockdown would push the nation towards a possible crisis. Eighty percent of Indian companies are asking its employees to work from home while many companies have sent their staff on unpaid leaves and a few quietly terminated the contracts. All financial centres are shutdown. The unemployment has multiplied reaching highest ever with GDP crashing down. Many sectors have no activity as these can’t be operated from home. The Stock Markets are falling and foreign investors are pulling out of the market. Impact of these developments is long term and huge for India and revive economy is no less a herculean task. Can Modi deliver it in post- Covid period with or without Financial Emergency?

(Author is a retired IAS officer)
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