The Hindu Business Line : Putting State finances in order is the need of the hour

WITH the Congress alliance supported by the Left parties likely to form the Government at the Centre, the state of State finances particularly those of Andhra Pradesh, Bihar, Kerala, Maharasthra, Tamil Nadu, Uttar Pradesh (to an extent if SP or BSP joins the Government) and West Bengal need to be studied as they are not in their pink of health for quite some time.

That the finances of the States were never as bad as they are now is attested not only by leading policy-making body such as the Planning Commission but also by the country's apex bank, the Reserve Bank of India and by political economists of standing.

The distinct fiscal deterioration in the second half of the 1990s was due partly to inadequate increase in tax receipts, negative or negligible returns from public investments and partly to spurt in expenditure on account of interest payments, higher salary outgo on account of pay revision and higher pension outgo.

The RBI estimates that pension payments now pre-empt about 10 per cent of revenue receipts as compared to less than 3 per cent during the early 1980s.

The latest study group on reforms in State public sector undertakings (SPSUs) of the Planning Commission pointedly stated that about 80 per cent of the total SPSUs in 1998-99 (the latest available figure as compiled by the Plan panel) was shared by Andhra Pradesh, Delhi, Gujarat, Karnataka, Kerala, Maharashtra, Tamil Nadu, Uttar Pradesh and West Bengal, while 90 per cent of the accumulated losses were incurred by Andhra Pradesh, Assam, Delhi, Gujarat, Karnataka, Kerala, Maharashtra, Orissa, Punjab, Tamil Nadu, Uttar Pradesh and West Bengal.

"As the banker and debt manager to the State governments" the RBI has in its latest `State Finances - A Study of Budgets of 2003-04', attributed a host of factors to the widening of the fiscal gap of State governments.

These include a burgeoning interest burden, increasing pension liabilities, large administrative expenditures, colossal losses incurred by SPSUs, inappropriate user charges and deceleration in Central transfers.

With States' persistently large revenue deficit leading to a higher fiscal deficit and spiralling debt, RBI rightly bemoans the emergence of "a vicious cycle of deficit, debt and debt service payments" in the finances of States.

The RBI has, however, detected desirable policy initiatives to encourage and enable fiscal reforms at the State-level covering among others on the revenue front, strengthening of tax efforts and rationalisation of user charges relating to power, water and transport and on the expenditure side, containment of expenditure is sought to be scored through cuts on fresh recruitment/ creation of new posts and cutback in administrative expenditure.

In 2001-02, the revenue receipts of States had worsened to 7.4 per cent from 14.8 per cent in 2000-01which was due to the deceleration in the devolution of taxes from the Centre. In 2002-03, revenue receipts logged an increase of 15 per cent mainly due to higher growth in States' own taxes and grants from the Centre. The budget estimates for 2003-04 had envisaged a growth rate of 13.7 per cent in States' revenue receipts, which are likely due to higher growth rates in States' own revenue receipts.

The RBI study proclaims that in strengthening the fiscal reform programmes being pursued by State governments, the power sector reforms have assumed critical importance.

The subsidies doled out by State governments to partly compensate the State electricity boards for the subsidised sale of electricity to agriculture and domestic sectors have been on the rise in recent years. The electoral promise of the Andhra Pradesh Chief Minister, Mr Y.S. Rajasekhara Reddy, to provide free power to farmers as the cost would only be Rs 300 crore in a State budget of Rs 43,000 crore and the Left Parties penchant for strident opposition to any revision of power tariff for farmers and the DMK President, Mr M. Karunanidhi's soft corner for poor farmers in terms of providing them free power would make light of any serious bid to persist with power sector reforms at the State level.

So the RBI's plea that power sector reforms are crucial in view of their significant fiscal implications is bound to go unheeded at a time when several positive initiatives on this sector appear to bear some noticeable benefits.

Even as the States have placed an accent of harmonising the inter-State tax regime to preclude rates war to attract investment and switchover to value-added tax (VAT), its implantation remains stuck on the issue of compensating over the loss of revenue in the initial period of VAT advent. This issue too needs the attention of the new Government in the larger interests as VAT not only avoids cascading of taxes but is also likely to augment revenues as the coverage expands to value addition at all stages of sale in the production and distribution chain.

The States' need to be guarded over the recent Central Government decision to merge dearness allowance with basic pay for its employees, as any replication in their economies would endanger their fragile financial position just as the implementation of the Fifth Pay Commission created a crater in their finances.