The Hindu Business Line : World Bank proposes more borrowing flexibility for States

AS the 12th Finance Commission is about to submit its report in a month's time, the World Bank has pitched for greater borrowing flexibility vis-à-vis the States and, in the process, has focussed its attention on the precarious fiscal situation of the States. It has also suggested adoption of fiscal responsibility legislation by all States and strict monitoring by the Centre and external agencies.

The report strives to generate a public debate on reforms in the States, which are submerged in the sea of politics.

According to Mr Stephen Howse, co-author of the recent World Bank report, titled `State Fiscal Reforms in India: Progress and Prospects', the poor States within the Indian confederation have to discharge social responsibilities and at the same time prevent themselves from falling victim to fiscal bankruptcy.

Speaking at a workshop on the report at IIM-Calcutta, Mr Stephen Howse further suggested that while some States had shown progress in fiscal reforms, at the aggregate level there were few signs of improvement. Debt burden of the States continued to increase alarmingly.

"States should be given more borrowing flexibility within firmly established global caps. Reforms to the grant system should aim to make it both progressive and more performance-oriented," Mr Howse added.

A monitoring mechanism for fiscal responsibilities of the States would provide important institutional backing for State-level fiscal reforms.

Though he admitted that though the situation now is more "favourable" than five years ago, State-level fiscal adjustment and empowerment without the collaboration with the Centre cannot be achieved.

"Achievement of fiscal adjustment for the poorer States is possible only with successful central tax reforms", the World Bank economist pointed out.

"Especially, for poorer States, revenue balance implies large primary surplus and more scope for increasing Capex".

India's State governments have significant, if not the main responsibility for many of the developmental areas that the World Bank is financing, such as irrigation and roads, health and education. If States finances are not put on a stronger footing, the sustainability of investments cannot be assured, and Government effectiveness will continue to suffer.

On the expenditure side, the World Bank report suggested that the States should opt for restraint on hiring and real wage, containing pension bill, better subsidy management including introduction of commercial discipline and "quality spending".

On the revenue side, the World Bank expert feels that the VAT introduction should be voluntary and the basis of floor rates. The tax base of the States should be increased by bringing more services into the net and enhancement of the professional tax limit. He also suggested that more attention should go to tax administration reforms rather than on tax policy reforms.

The World Bank has planned public debates on the report across the country.

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