The Hindu Business Line : IMF pats States on the back

The weakest link in the chain of India’s fiscal management has been the State governments. The six years from 1997–98 to 2002–03 have been described as the worst in the history of State finances. Unlike in the case of the Central Government, the States have a direct and close interface with the people. Hence, they find the pressures and demands from various sections of the people irresistible.

Electoral compulsions affect the State finances in two ways: Giving in to populism results in excessive drain on the public exchequer which the States can ill afford. Of late, all States have begun applying the scales of pay proposed by Central Pay Commission for Central Government employees to State employees as well, leading to a a near doubling of expenditure on wages, salaries and pensions.

To ingratiate themselves with their vote banks, parties ruling the States embark on schemes of dubious merit. For the same reason, they also do not make vigorous efforts to exploit the full potential in the matter of mobilisation of resources by way of levying taxes and user charges where justified, revising them upward rationalising them whenever necessary and being strict in collecting them where levied.

An offshoot of this tendency is their heavy and chronic dependence on overdrawals from the Reserve Bank of India (RBI) and handouts from the Central Government either in the form of advances from amounts due to be transferred to them as per recommendations from Finance Commissions or ad hoc accommodations.

In order to arrest these trends, the Twelfth Pay Commission had suggested some salutary measures for restructuring Central and State finances such as: Reduction of fiscal deficit to GDP ratio to 3 per cent, wiping out revenue deficit by 2008-09, bringing down debt-GDP ratio to 28 per cent and keeping the salary bill relative to revenue expenditure to a level below 35 per cent. Many of the Commission’s suggestions have since been incorporated in the Fiscal Responsibility and Budget Management Act.

Fiscal correction

A staff paper released by the IMF on August 1 giving an overview of the State finances gives the States a pat on the back. Of course, the credit for a good part of the improvement should go to generous transfers of tax and excise revenue and higher grants from the Centre, debt restructuring, and debt relief, combined with a stricter borrowing regime, with the Centre and the RBI imposing a cap on borrowings and restricting lending only to fiscally weak States.

Even so, the findings of the paper show a realisation of the importance of fiscal prudence on the part of the States. The paper approvingly commends the States’ fiscal correction programme, particularly on the revenue account , and the gearing of their fiscal policy towards consolidation and reducing the high public debt ratio. It finds it reassuring that there has been reduction in alternate measures of deficit as well as liquidity management. It is good to know that “By 2006-07, the consolidated States revenue balance as a proportion of GDP had already turned into a surplus exceeding the Twelfth Finance Commission’s 2008–09 targets. The consolidation in the gross fiscal deficit and primary deficit positions also shows similar over-achievement. The budget estimates for 2007-08 reflect continued strong commitment by States to reduce the remaining imbalances or build on their consolidation efforts.”

The concluding part of the paper includes a warning on the improvements made so far being set at naught by the Sixth Pay Commission’s recommendations. It also has some useful pointers to the further attention to be given to the overhaul of public sector enterprises and better targeting of subsidies.

On the whole, a paper that is both timely and instructive.

B. S. RAGHAVAN

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