March 2, 1998

With the Centre refusing to help, the states are pushed into a deeper fiscal crisis. The first casualty of the cutbacks: development programmes

By Shefali Rekhi

It's the season for despair. The inevitability of another coalition government apart, North Block has been bogged down by its expenditure overruns and revenue shortfalls. Just as it was coming to terms with the situation, it is now inundated with requests from state governments to allow them to defer the payment of their last quarter dues to the Centre. As many as 15 states claim they are not in a position to pay up and want time till next year.

Seventeen states have also written in asking the Centre to share the burden of pay hikes for state government staff. The extra amount required is a disturbing Rs 40,000 crore (as against the budgeted Rs 60,000 crore), most of which must be arranged for in the current and next fiscal. But the Centre is in no mood to oblige. Says A.K. Pradhan, joint secretary in the Union Finance Ministry: "We had to reject the requests because we are not in a position to help."

This means a deeper economic crisis in the states. With bills mounting and revenue inflows refusing to look northbound, they will now have to further cut expenditure on the development front. "In the real sense, many of the states are already in deep trouble," says Tapas Sen, economist with the National Institute of Public Finance and Policy (NIPFP), who helped prepare the white paper on subsidies for the Finance Ministry. "They are now getting into a mess from which it will be difficult to get out."

The states are determined to get the Centre to bail them out. Seething as they already are with its decision against the immediate disbursement of their 77.5 per cent share of the Rs 10,050 crore VDIS bounty, they are waiting for the new government to be formed. Besides pressing for a faster disbursal of the VDIS money, they also plan to petition the 11th Finance Commission, once it is set up, on the issue of sharing the pay-hike burden. The West Bengal Government plans to take up the issue on priority at the next chief ministers' meet. But that may be too late considering the state in which most of the economies are.

SPENDING RECKLESSLY
State expenditure on administrative and general services this year, says the latest RBI bulletin, will increase by 44.3 per cent and 66.4 per cent respectively. Expenditure on direct developmental activity is expected to increase by a mere 4.6 per cent, while spending on energy and industry will be half that in 1996-97. Haryana, Karnataka, Madhya Pradesh, Maharashtra, Punjab and Uttar Pradesh are states where non-development expenditure is expected to rise substantially.

The skewed spending is leading to other problems. Nearly 60 per cent of the total revenue received in most states goes for paying interest on loans, pension and retirement benefits, beefing up security and routine administration expense. There have been cutbacks in education, health and other social sectors. In Maharashtra, for instance, the annual grant of Rs 5 crore to tribal residential schools and Rs 8 crore to 140 rehabilitation centres for handicapped children remains a promise. The Manohar Joshi Government has also been unable to pay the promised Rs 250 crore to farmers hit by the onion crisis. In Akola district, zilla parishad contractors boycotted a tender for a road development project because past dues had not been cleared.

There is an acute financial crunch in Andhra Pradesh as well. Says state Finance Secretary D. Subba Rao in a lighter vein: "Even my travel agent helps out by waiting a couple of months to collect payment for my plane tickets to Delhi." In Rajasthan, three bridges at the Malviya Nagar, Jhotwara and Gopalpura bypasses have been abandoned half way because of the paucity of funds. The cost of these projects put together was a mere Rs 48 crore. Elsewhere in Orissa, the state Government has drastically cut down its development expenditure from the budgeted Rs 2,700 crore to Rs 1,200 crore to avoid a squeeze. "Development is suffering," admits a senior bureaucrat.

WHO'S TO BLAME?
The annual stock-taking of state finances by the Planning Commission, which held review meetings with 23 state governments, reveals that against the targeted plan expenditure of Rs 61,000 crore, the states will be able to spend only Rs 50,000 crore. Says K.M. Thomas, joint adviser with the commission: "Fiscal problems for the states will definitely aggravate and they are bound to fall short of the expenditure targets."

With inadequate emphasis on the mobilisation of taxes, revenue deficit is estimated to be Rs 15,373 crore. Ironically, the 10th Finance Commission had estimated that the states would be in deficit by only Rs 777 crore in the current year. The commission's hopes of any earnings from the loss-making state electricity boards and road transport corporations, the two major public-money guzzlers, will also remain a distant dream. And debt seems certain to shoot, as is the interest burden.

So how did the states come to such a pass? To begin with, the Indian Constitution gives states considerable autonomy in defining their development policies. For their funding needs, they bank on transfers from the Centre, the pace of which increased in the early '70s. As the World Bank in its latest India Country Report points out, "This built expectations that the states need not be overly concerned with mobilising resources." Throughout the '70s and the '80s, the states pumped substantial amounts into power, irrigation, ports and roads without putting in place systems for recovering costs.

Now, as the NIPFP report on subsidies observes, two-thirds of the non-merit subsidies are state-sponsored. The recovery is no more than 10 per cent, which means that the state governments do not recover 90 per cent of the cost they incur. The populism of the late '80s has cost the states dear and the general decline in the Central flow of funds since 1991 has only made matters worse.

Not surprising then that last year, eight state governments sought overdrafts from the RBI. One of them even turned a defaulter as it couldn't clear the dues within the stipulated period of 10 days. And lest the number of defaulters grew, the apex bank gave in to pressure from the states to increase the limit on advances. In the case of normal advances, the states can now borrow up to 168 times the total deposit that they maintain with RBI. If the need for a special advance arises, they can borrow up to 64 times the deposit.

But for how long can such short-term concessions be sustained? With both the Centre and the states lacking the will to undertake serious reforms in policy, economic progress of the common man will be the casualty.

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