The Hindu Business Line : For fiscal rectitude

THE RECOMMENDATIONS OF the Twelfth Finance Commission (TFC) come at a crucial time when the finances of the State governments are manifestly in dire straits because of sluggish non-tax revenues, committed non-developmental expenditure and meagre outlays on social infrastructure. The total transfers recommended by the TFC are 73.8 per cent more than what its predecessor allowed with both the share in Central taxes and grants-in-aid being higher. Obviously, the States have scant cause for compliant over the TFC report made public a week ago.

Headed by the eminent monetarist and former RBI Governor, Dr C. Rangarajan, the TFC, while enlarging substantially the transfers to the States, has sought to end the practice of Central assistance for State Plans (comprising grants and loans). Eligible only for Plan grants, States will have to do their own borrowing to fund their Plans. Promptly grabbing this opportunity, the Finance Minister, Mr P. Chidambaram, with an eye out to cut the fiscal deficit, pruned the Plan expenditure component for the next fiscal by Rs 29,003 crore in his General Budget on the premise that the States would themselves raise funds, as suggested by the TFC. Now, even advanced States have run up massive debt, ranging from Rs 36,230 crore for Karnataka to Rs 74,692 crore of Maharasthra (as on end March 2004). Surely, the TFC asking the States to borrow directly is a prescription to tread the path of prudence instead of looking constantly to the Centre for bail-outs. However, the TFC has directed the Centre to continue loan intermediation on behalf of States that may not be able to tap the market.

On the constant refrain by States of debt relief, the TFC has broken fresh ground. Henceforth, all Central loans to States contracted till March 2004 and outstanding on March 31, 2005, amounting to Rs 1,28,795 crore would be consolidated and rescheduled for a fresh tenure of 20 years at 7.5 per cent. A debt write-off scheme aligned to the absolute amount by which the revenue deficit is whittled down is a salutary step, and should goad the State governments to be both efficacious and judicious in their expenditure programmes. The move to terminate the Fiscal Reform Facility, introduced during the Eleventh Finance Commission implementation period and which set store by fiscal consolidation, power and public sector reforms, cannot be faulted as the scheme of debt relief outlined by the TFC is well-crafted and comprehensively linked to specific reform milestones.

Decentralisationin administration is the new mantra, and the TFC has rightly plumped for a total grant of Rs 20,000 crore to Panchayati Raj institutions and Rs 5,000 crore to the urban local bodies for 2005-10. Thisshould help rejuvenate grassroots involvement in the development process. The proposal to make project assistance to States only on terms similar to that set by external funding agencies should make a qualitative difference to the commissioning, operation and maintenance. This could set the States on a higher growth path, while simultaneously addressing the twin scourges of development deficit and lop-sided regional development.

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