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Tuesday, Oct 08, 2002

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Oct 18 meeting of CMs with PM on State finances crucial

G. Srinivasan

Outstanding debt of the States, which was 18.62 per cent of GDP at the end of 1993-94, rose markedly to 23.39 per cent by the end of 2001-02 (revised estimate)


WITH the Planning Commission suggesting a slew of steps to set right the fiscal imbalances of the States in the draft Tenth Plan document, the proposed meeting of the State Chief Ministers with the Prime Minister Mr A.B. Vajpayee, on October 18 assumes crucial significance.

Highly placed Government sources told Business Line here today that the October 18 meeting is crucial since the extant fiscal scenario of States is perilously fragile with the finances of State Governments showing "considerable deterioration" in the decade of the 1990s.

The fiscal position of State Governments had been under stress presumably due to inadequacy of receipts in meeting growing expenditure requirements with their outstanding stock of debt rising sharply. Outstanding debt of the States, which was 18.62 per cent of GDP at the end of 1993-94, rose markedly to 23.39 per cent by the end of 2001-02 (revised estimate). The sources said that over 63 per cent of the borrowings by the States went for current consumption and a little over 36 per for capital formation.

State Governments have ascribed the deterioration to the decision of the Union Government on pay revision based on the findings of the Fifth Central Pay Commission, increasing loan burden of Central assistance and shortfall in devolution of States share in Central taxes as compared to budgeted figures.

The sources said that salaries, pension and interest payments now gobble up 75 per cent of total revenue receipts of States.

What is worrisome, the sources said, is that if State budget debt and guarantees are looked at in an integrated way, their consolidated debt as a percentage of GDP has crossed 31 per cent for all States in the aggregate and this is clearly "an unsustainable position." By 2001-02, the estimated guarantees extended by States had reached Rs 13,56,000 crore and stood at 7.18 per cent of GDP. A large proportion of such guarantees were given against projects where there was no immediate possibility of servicing the loans from the project cash flows. The sources said the liability of servicing the interest and instalments devolve largely on the States themselves.

At the October 18 meeting, a review of Medium-Term Fiscal Reforms Programme (MTFRP) covering the period 1999-2000 to 2004-05 could be made to take stock of the situation since as many as 16 States had finalised such a medium-term plan with the Ministry of Finance, the sources said. Alongside the MTFRPs, additional steps like curtailing recourse to off-budget borrowings by States and putting an end to the practice of all-India financial institutions insisting upon State government guarantees for financing economically unviable projects.

The meeting would also analyse the contours of States debt swap scheme particularly as to the nature of outstanding States' debt that could or ought to be swapped, the implications of such a debt-swapping scheme on the market and over what period of time should the swaps be phased, keeping in view the quantum and the likely effect on future interest rates. Besides, the meeting might also discuss steps for improving revenue collection with the Centre underscoring the need to organise the tax system of States by introducing floor rates of taxes and easing out the extant concessions and tax holidays. There should also be no more delay in implementing value-added tax (VAT).

Few other taxes that the States could impose but remain unexploited include taxation of agriculture income and profession taxes. Stamp duty and registration fees and motor vehicle tax could also yield more revenue through better administration in which computerization of information pertaining to taxable transactions could be of immense use, the sources pointed out.

On their part, some State Governments have voiced the steps to be taken by the Union Government to ease the fiscal pressure confronted by them. These include, expeditious enactment of legislation enabling States' to tax services, reduction in the interest rates on Central government loans, revision of the formula of Plan assistance to State Plans from the current 30:70 for grant and loan to 50:50 and provision of special assistance for half of the additional burden of pay revision for the States through special ways and means advance from RBI for a period of three years with the States consenting to adopt a medium-term fiscal reform programme.

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