The Hindu Business Line : The impossible quadrangle

IN THE fourth Dr Ambirajan memorial lecture organised at Chennai on February 16 by the Public Expenditure Round Table and the Institute of Economic Education, the Chairman, Madras School of Economics, Dr Raja J. Chelliah, dealt with the malady of continuing fiscal imbalance in the country — a metastasising cancer making the future economic and social resurgence of the country problematic.

Dr Chelliah attributes this to four mutually incompatible policies affecting government finances pursued by the Government.

The first is the disincentive to the States to raise their own resources inherent in the Centre undertaking, on the recommendations of the Finance Commission, to fill the gap between the States' Plan and non-Plan expenditures and the resources raised, without making any distinction between grants and loans.

The second is the provision of loan assistance to States, based, not on repayment capacity and the existing burden of public debt, but on a fixed entitlement formula.

The third is the adoption of central pay commission's recommendations to State government employees unmindful of the size of the labour force, general level of salaries and per capita income in each State, and (may it be added, even though Dr Chelliah does not mention it) the material difference in the nature of the functions and responsibilities of the Central and State government employees.

The Government has been trying in vain to reconcile the above three policies with the fourth one of maintaining fiscal health through responsible fiscal policies aimed at balancing the budget, not realising that they form an "impossible quadrangle" which cannot but lead to a chronically unstable situation.

Dr Chelliah offers a new approach which casts the primary responsibility of maintaining fiscal balance on the States, and seeks to de-addict them from dependence on central transfers by keeping the percentage share of taxes going to the States constant for 15 years and by asking them to borrow from the market.

The loan component derived from small savings collection should be reduced.

The Planning Commission should look after only capital investment, and the distinction between Plan and non-Plan expenditure should be abolished.

The whole exposition deserves the closest study by policy-makers at every level.

B. S. Raghavan

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