The Hindu Business Line : The economic decline of Maharashtra

The economic decline of Maharashtra began in 1995-96 with the coming to power of coalition governments. The State's debt has now reached a staggering Rs 1.15-lakh crore and the debt servicing burden has risen sharply despite the lowering of interest rates in recent years. The worsening fiscal situation is a cause for concern, more so, because historically, Maharashtra was one of the better-managed States, says S. D. Naik.

RAMPANT political populism, poor financial management, lack of administrative reforms and declining standards of governance have brought about the economic decline of the once prosperous and well-managed State of Maharashtra.

The economic decline of Maharashtra began in 1995-96 with the coming into power of coalition governments. This is evident from the fact that the economic growth rate of the State fell sharply from 7.5 per cent per annum between 1985-86 and 1994-95 to 4.5 per cent per annum between 1995-96 and 2003-04. This can be attributed to the deceleration of public investment and relative neglect of agriculture. Though the State GDP rose 6.4 per cent in 2004-05, it still remained well below the Tenth Plan target of 8 per cent.

Moreover, with the power sector in the State being in quite a bad shape, compelling the State electricity board to resort to widespread load shedding, it may not be possible to maintain the growth rate of the economy at a reasonable level. Rural areas in the State are currently subject to load shedding ranging from to eight to 10 hours while in urban areas it varies from two-four hours. Unfortunately, the situation is unlikely to improve in the near future. Bad planning and failure to attract new investments in the sector have landed the State in the present situation.

According to a report released by the Planning Commission, the fiscal deficit of the State rose sharply from 2.8 per cent of GDP in the early 1990s to 5.8 per cent between 1995 and 2000. While it fell to 4.1 per cent of the GDP in subsequent years, it remained much higher compared to the first half of 1990s. Moreover, the later figure of fiscal deficit does not fully reflect the precarious financial position of the state.

It may be noted that many state-level public sector undertakings have raised money in the domestic market with an `unconditional and irrevocable' guarantee from the State government. These borrowings are kept outside the purview of the Budget, as they do not need the approval of the State legislature. Consequently, the actual revenue and fiscal deficits are much higher than the official figures. What is worse, increasing proportion of the growing deficit has been financed by funds from various public accounts, some of which are reserve funds earmarked for capital investments and poverty reduction schemes. Also, to circumvent the Centre's controls on State government borrowings, several special purpose vehicles (SPVs) have been created in Maharashtra in recent years. Debt charges — interest and principal — of these SPVs are paid directly from the State government Budgets. Hence, these are, actually, part of government borrowings. Of course, these practices are not peculiar to Maharashtra alone and are being resorted to by several other States.

The worsening fiscal situation of the State is a cause for concern, more so because, historically, Maharashtra was one of the better-managed States in India. In the first half of the 1990s, for instance, it had the lowest revenue deficit and the second lowest fiscal deficit to gross state domestic product (GSDP) ratio among the 14 major Indian states.

However, there was across-the-board deterioration in the State's fiscal situation since the second half of 1990s: Tax and non-tax receipts stagnated; total government expenditure rose sharply, and its composition worsened; major portion of the revenue now goes towards interest payment and wages, leaving little for development expenditure; off-budget borrowings and contingent liabilities have reached distressing levels; some state enterprises have even defaulted on their interest payments.

Maharashtra's debt has now reached a staggering level of Rs 1.15 lakh crore and the State government's debt servicing burden has increased sharply despite the lowering of interest rates in recent years. Though the State government recently claimed that it has come out of the red, the ground reality appears different with little effort to enforce economic reforms.

True, in the latest Budget, the State government has managed to show a small revenue surplus after many years. But if it persists with populist subsidies, it may end up cutting down the developmental expenditure further instead of reducing the non-developmental expenditure.

If one looks at the changing composition of spending, it is seen that capital and development outlays have gone down significantly between 1994-95 and 2001-02 (RE). While revenue expenditure grew at an average rate of 15 per cent per annum over this period, capital outlays increased at an average rate of just four per cent. Thus, the State has been on a borrowing spree over this period primarily to finance current consumption (to pay for the growing salaries, pensions and interest payments), which accounted for 80 per cent of total revenues.

Against this backdrop, it is not surprising that the first Maharashtra State Development Report (MSDR) prepared by four independent academic research institutions under the aegis of the Planning Commission has given a clear wake-up call to the political leadership of Maharashtra.

The report prepared by experts from the Indira Gandhi Institute of Development Research, Gokhale Institute of Politics & Economics, Jamnalal Institute of Management Studies and Tata Institute of Social Sciences has warned that the economy of the State would go out of control if the Government does not enforce fiscal discipline.

The report has blamed the State government for its failure to undertake fiscal reforms and for wasting funds on populist schemes that are economically unviable. It has listed major administrative failures such as diversion of funds, growing backlog of expenditure on development works and the faulty revenue models of projects such as the Maharashtra Krishna Valley Development Corporation.

According to the report, the key measures to solve the State's mounting financial problems are: Withdrawing financial support to co-operative sugar mills, cutting down subsidy to cotton growers, allowing greater fiscal autonomy to local self government bodies, restructuring public sector units and early completion of pending irrigation projects worth Rs 33,000 crore before taking up new projects.

The report has also recommended attracting private investment in infrastructure projects and reduction in the number of government staff by two per cent per year to bring down the salary bill.

In the wake of the spate of farmer suicides in recent times in the State, the MSDR seems to hit the nail on the head when it describes agriculture as the "crucial strategic question" in the State's future. This is because though Maharashtra is the country's most industrialised state, agriculture and allied activities are still predominant, with 55 per cent of the State's population depending on it for its livelihood as per 2001 Census.

Although this is lower than the national average of 59 per cent, if we exclude Mumbai, the figure of workforce engaged in agriculture rises considerably. In fact, 20 out of the 34 districts in the State continue to have 60 per cent of their workforce engaged in agriculture. This is mainly for want of alternative job opportunities outside agriculture. Though the proportion of area under cultivation in the State is as high as 43.4 per cent, agriculture is not as productive as in many other parts of the country because of the quality of soil, topography and climate. For instance, food grains production in the state averages just 103 kg per hectare compared to Punjab's 1,032 kg. To add to the problems of agriculture, the proportion of gross irrigated area to gross cropped area in the State is only 16.4 per cent against 38.2 per cent at the national level.

Because of the overcrowding of workforce in agriculture, over the years, there has been increasing marginalisation of farmers in the State. The share of small farmers went up to 74.3 per cent and that of large farmers declined from 40 per cent to just nine per cent between 1970 and 1996. The average size of holdings fell from 4.28 hectares to 1.87 hectares over the same period.

Not surprisingly, the rural-urban divide in the State is quite sharp. The per capita income of Mumbai, for instance, has remained consistently about 2.5 times that of rest of Maharashtra. One comes across acute poverty among large sections of the State's rural population. The State's achievement in respect of poverty alleviation is far from flattering, though it is the third richest state in the country. The MSDR describes the State as "islands of urban prosperity in a sea of rural poverty".

Unfortunately, the wrong choice of certain crops has done much harm to the farm sector in the State. Sugarcane and cotton are not economically viable because of their relatively poor productivity.

Moreover, sugarcane is a water-guzzling crop. However, since most of the sugar co-operatives in the State are controlled by political heavy weights, economic pragmatism has taken a back-seat.

In this context, the MSDR has also drawn attention to the worsening problem of water and environmental degradation. It has pointed out that the environmental degradation in the State is far more serious than in other states. Depletion and pollution of water resources has become a big problem. While rural areas have difficulty in accessing safe and clean drinking water, urban areas have been getting inadequate supply.

The MSDR has rightly recommended that the subsidies to cotton and sugar co-operatives should be withdrawn and the Monopoly Cotton Procurement Scheme needs to be phased out. However, since both these are politically-sensitive issues, the State government is unlikely to act on these recommendations. In fact, the Chief Minister, Mr Vilasrao Deshmukh, has already indicated as much. The least the State government could do under these circumstances is to ask the agricultural universities and research institutes to study the land use pattern in the State and suggest suitable changes in the cropping pattern for different regions.