The Hindu Business Line : IMF on State finances

THE research and analysis wing of the IMF has of late begun to turn its attention to fiscal and monetary issues pertaining to India. When the consultants are engaged by the Fund to prepare working papers, they usually do a thorough professional job, since they are not immediately subject to any political or other extraneous pressures.

After being repeatedly buffeted by criticism and witnessing the consequences of its own immaturity and ignorance, the IMF nowadays has tempered its approach with greater humility and a willingness to learn from countries such as India. An indication of this is its appointment in 2002 of Dr Montek Singh Ahluwalia as the independent evaluator of its programmes and policies.

Its latest working paper on "The Decentralisation Dilemma of India" makes useful reading. It ranks India among the most decentralised economies in the world, with the States undertaking more than half of general government spending. But since they account for less than 40 per cent receipts, there has been a precipitous and unchecked deterioration in the State finances. They have become addicted to transfers from Central Government, which, the paper notes, comprise almost 40 per cent of State revenues and cover half of States' current outlays. The adoption of the Fifth Pay Commission's recommendations has meant a steep jump by 400 per cent in wages, pension and administrative costs since the mid-1980s.

Subsidies and other reckless acts of profligacy in various forms have taken the States to a perilous brink. The paper names Andhra Pradesh, Bihar, Gujarat, Karnataka, Tamil Nadu and West Bengal as the ones with the largest deficits and debt burden at the end of 2000, causing 60 per cent of the decline in financial indicators since 1997-98. The paper expresses concern that expenditure pressures in these six States ranged from a low of 14 per cent to a high of 132 per cent.

Solution? Ask States to sign formal debt restructuring contracts, with fixed payments schedules, with the Centre and bear part of the bailout costs. Stop all federal transfers and ban new borrowing by States until they lowered their debt to revenue ratio. Impose interest penalties for non-compliance. Make it mandatory for States to provide collateral for new State bonds. Introduce risk-based credit ratings against which the justification of all requests for loans by States will be examined. Sternly enforce a specified ceiling on the power of States to issue guarantees. In short, wean the States away from the assumption that they could go on mismanaging in the expectation of the Centre coming to its rescue. What did you say, Mr Finance Minister? Remind you after the election is over?

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