The Hindu Business Line : States want more

Like the ones that preceded it, the Sixth Pay Commission award will punch some large holes in the finances of the States. Fearing the worst, a recent meeting of State finance ministers held in Thiruvananthapuram demanded that the Centre bear 50 per cent of the additional wage bill of the States. The apprehensions are not unfounded. There was a marked deterioration in State finances after the implementation of the Fifth Pay panel award began in 1997-98. By 1999-2000, the fi scal deficit as a proportion of the net State domestic product was more than 5 per cent in 11 States and more than 7.5 per cent in five States. The share of their capital expenditure in total spending declined from 16 per cent in 1990-91 to 13.1 per cent in 2000-01.

When States decide to implement the recommendations of the sixth pay panel, they should avoid a repeat of this situation. If the current growth impetus is not to be lost, States need to step up investment in physical and social infrastructure, not pare them. While it can be argued that salary revisions will result in better employee morale and performance, and therefore higher revenues, State finances may still need some bolstering. There might be a case to raise transfers to states from the current level of 30 per cent of the Centre’s tax revenues, mandated by the Twelfth Finance Commission, so that states can keep up their efforts at infrastructure creation. To be fair to New Delhi, the annual rate of growth of transfers has improved from 13 per cent in the 1990s to about 18 per cent at present, indicating that the Centre is willing to share the benefits of tax buoyancy.

States, too, must set their houses in order instead of blaming the Centre for their troubles. While value added tax has helped shore up state revenues, the switch alone will not be sufficient to keep up with growing expenditure commitments. Instead of wooing investors with improved infrastructure, many States have chosen to offer financial and other incentives that mean forsaking revenues for many years. Leakages in stamp duty collections on property transactions are rampant in most States. Despite attempts at reform, annual losses of state electricity boards remain in the region of Rs 30,000 crore. Sadly, there is little evidence of introspection by state finance ministers on these and other issues. That they do not discuss devolution of financial power and resources to local governments and the role to be played by state finance commissions only suggests that their attitudes have not changed in keeping with the 73rd and 74th amendment to the Constitution. The Thirteenth Finance Commission should reflect on the new realities and challenges.

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