The Hindu Business Line : Focus on dealing with the debt burden of States

It is also a disquieting development that all States save Tamil Nadu, Maharashtra and Karnataka had debt to National State Domestic Product ratio higher than 30 per cent.

New Delhi , Nov. 26

STATES saddled with hefty debt burden have banded together to call on the Prime Minister, Dr Manmohan Singh, early next week for alleviation of their suffering on this score as stated by the Andhra Pradesh Finance Minister, Mr K. Rosaih, in Hyderabad, makes a disconcerting reading.

The States seeking succour in this regard include besides Andhra Pradesh, Tamil Nadu, Kerala, Karnataka, Maharashtra and Punjab.

Their plea for Central assistance and intervention in debt servicing problems plaguing them in a co-operative federalism like India ought to be kept in view, particularly when the Government at the Centre too is composed of coalition partners of major regional political parties.

A recent presentation in the Planning Commission on the fragile fiscal plight of State governments, their mounting indebtedness and their implications for financing plans is an eye-opener. Some quick calculations on the States' direct debt as on end-March 2004 comprising of NSSF investments, Government of India (GoI) Plan loans and medium-term loans, small savings loans and SLR borrowings together with indirect debt inclusive of institutional loans, Provident Fund, other outstanding bonds such as power bonds, GoI loans through other Ministries put the liability at above a staggering Rs 8,00, 000 crore in 2003-04 from a level of Rs 1,10, 289 crore in 1990-91.

State debt has multiplied 33 times in 23 years with debt galloping at more than 15 per annum for as many as 17 States.

It is also a disquieting development that all States save Tamil Nadu, Maharashtra and Karnataka had debt to National State Domestic Product ratio higher than 30 per cent; Bihar, Orissa, Punjab, Arunachal Pradesh, Himachal Pradesh, Manipur, Mizoram and Sikkim ratios surpassed 50 per cent.

Under the Fiscal Reform Facility (FRF) of the Ministry of Finance and the plan panel, a medium-term fiscal reform programme of 27 States was unveiled a few years ago, for which 19 States had signed MoU with the Centre.

As on mid-October 2004, grants amounting to Rs 5,022 crore have been released from the FRF incentive fund and additional market borrowings were allowed to seven States amounting to Rs 2,363 crore for financing structural reform.

Joining the plan panel in highlighting the parlous state of State finances of India is a latest report from the World Bank on "State fiscal reforms in India" which counsels the crucial role of Central Government leadership to the ongoing State fiscal reform moves. On the tax front, central leadership is required to goad the States to move forward with value-added tax (VAT) introduction and to phase out taxes on inter-State exports.

The Centre could also help States modernise their tax administrations in particular to partake of more information across States as well as with the Union Government to improve compliance and combat evasion.

However, the bank's study observation that over the 1990s, tax devolution and grants to the States have declined in relation to GDP, while loans to the States have increased, which call for reversal of trends only captures a part of the picture; the Plan panel presentation said share in taxes and grants improved by 74 basis points between 1999-2000 to 2003-04 (from 3.81 per cent to 4.55 per cent), reversing the trends of the 1990s when grants and share in taxes together declined from 4.42 per cent of GDP in 1994-95 to 3.64 per cent in 1998-99.

It is optimistically stated that with tax performance of Centre improving further this fiscal, grants and share in taxes would go up further.

The stocktaking report of the Bank designed to share the lessons of State-level fiscal reform to date and suggest what more could be done does not present any cosmetic remedies but a root-and-branch reform. Striving for fiscal empowerment i.e., shifting to a fiscal stance that makes the States more effective agents of development, entails expenditure restructuring, far-reaching expenditure management reforms and comprehensive revenue reforms and mobilisation, the bank suggests.

As free supply of power and water remain responsible for the rickety finances of State-owned public utilities, the bank report calls for focusing more on subsidy targeting and management, with a stress on instilling commercial discipline into the subsidy delivery systems. This, the bank said, will result in major efficiency gains that would themselves contribute to substantial subsidy savings.

Even as the States plead for debt restructuring, the bank cautions against debt relief that carries the risk of undermining fiscal discipline. More grants for poorer States and a strengthening of the extant FRF to award fiscal reformers might be better alternatives. With Dr Singh scheduled to meet six State representatives next week, there is no dearth of solutions but political compulsions in coalition governance demand a carefully nuanced solution, aimed at, as the bank put it, "both fiscal adjustment and at strengthening the development effectiveness of the States." This is the challenging facing the Centre in fiscal devolution.

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