States: Maharashtra; Perilously Perched

The BJP-Sena Government's desperate populist programmes drain the exchequer of precious revenue and push the state close to a debt trap.

It's early days yet but the signs are evident. When Maharashtra Finance Minister Mahadev Shivankar recently wrote to Chief Minister Manohar Joshi about the deteriorating condition of the state's finances, he was only endorsing the fears expressed by bureaucrats: that the BJP-Shiv Sena Government's populist policies were pushing the state close to a debt trap.

Last month, for instance, Chief Secretary P. Subrahmanyam had an unusual duty to perform. He had to remind the Government that there was no cabinet note for the promised sanction of Rs 143 crore as relief to cotton farmers. "Where would the money be drawn from?" he asked. While the money was paid out, who will eventually pick up the tab remains a mystery. Given the state of Maharashtra's finances, there would either have to be a cut in the Plan, to which the Government was not agreeable, or add to the deficit of Rs 7,748.39 crore.

GONE BUST

Of every rupee the state Government earns, 49.16 paise goes towards paying salaries and servicing debt. In relation to revenue earned, the figure is 75.23 paise. This year, Rs 4,400 crore will have to be borrowed to meet these ends.

As a result, there has been a fall in spending on development. Capital expenditure from borrowings has fallen from 90 per cent of fiscal deficit last year to 35 per cent. Consumption expenditure as a per cent of total expenditure has risen from 21.8 per cent last year to 28.1 per cent and gross capital formation has fallen from 18.9 per cent to 13.1 per cent.

The state is borrowing much more just to pay interest. The figure: Rs 4,070 crore, up from Rs 1,915 crore last year. Total debt: Rs 30,999 crore, up from Rs 16,020 crore in 1995-96. In other words, the state is walking into a debt trap.

Senior officials say that such instances of the Sena-BJP Government's "spend now, think later" syndrome abound. Indeed, the feeling is that the farmers should count themselves lucky since they received the money. Several other grand projects announced by the Government in its three-year tenure are in limbo simply because the state has no funds (see box) to get on with them. One such project is the grandiose Krishna Valley Irrigation Scheme announced in 1994, envisaging a cost of Rs 7,100 crore. The Government was supposed to have pumped in Rs 3,500 crore over a period of five years. In the first three years, it was able to provide a budgetary support of Rs 975 crore, this year the provision has been nil. Yet, that hasn't stopped it from announcing the Godavari and Tapti schemes.

Better still, it has stood guarantee to various state departments which have borrowed huge sums for power, irrigation and housing projects, expressways, flyovers and water supply schemes. This, without calculating how it would pay the interest, let alone repay the principal amounts. Take the case of the newly floated Maharashtra State Road Development Corporation for which the Government plans to borrow around Rs 2,000 crore. The interest alone would be over Rs 200 crore per year while the revenue is expected to be around Rs 130 crore. The plan is to raise the shortfall through land sale. But what is the guarantee that this will materialise given the recession in the real-estate market? Moreover, how will it source funds for the recurring years? "You can't fund a long-term project with short-term borrowings or recurring expenses with a one-time sale of assets," says a principal secretary in the state secretariat. "The answer lies in increasing revenue," offers a senior secretary, "but that does not seem to be the Government's priority."

Eighteen months ago, the Revenue Department mooted that the Government's land lease rates for high-value areas like Cuffe Parade, Hill Road, Bandra and Matheran be raised. But Finance Department officials have sat over it, ostensibly because they have not been able to decide on which inflation index to use to calculate the new lease rates. The result: the Government earns a paltry Rs 50,000 as annual lease revenue from Matheran when hotels in the hill station make 10 times that amount in a month. The same is the case with Cuffe Parade where the residents of flats costing crores of rupees pay a nominal revenue fixed on an ad hoc basis in the '70s.

There have been occasions when the Government has taken revenue-boosting decisions, but they have arrived too late in the day. In May 1997, after four years of dithering, the Government revised bus ticket rates by 25 per cent amid a chorus of protests. Within three months, fuel rates were hiked and the revenue increase was wiped out by the Rs 95-crore diesel bill. Consequently, the Maharashtra State Road Transport Corporation's net loss went up from Rs 113.43 lakh to Rs 13,838.38 lakh in 1996-97. The Maharashtra State Electricity Board (MSEB) is facing a similar situation due to the Government's inability to raise revenue and cut losses. The latest report on state public-sector enterprises (PSE) shows their profits dropped from Rs 416.90 crore to Rs 150.49 crore in 1996-97.

Strangely, the Government has not woken up to the gravity of the situation. Though Shivankar admits it is "worsening", he is chary of revealing the details of his letter, which was presented at the state BJP meeting in Panvel. State Finance Secretary R. Budhiraja too is circumspect. "This is a difficult year," he says, "particularly in the light of the Fifth Pay Commission recommendations." This entails an arrears bill of Rs 8,000 crore and a recurring annual expense of Rs 5,000 crore. A liability clearly beyond the state's paying capacity.

The Government is pinning its hopes on the 11th Finance Commission to wriggle out of the crisis. "We would like to get the power to tax the service sector directly," says Budhiraja. "Unless we start tapping it, there is bound to be trouble as there is a limit to how much we can tax the manufacturing sector." On his part, Shivankar is planning to follow Union Finance Minister Yashwant Sinha's footsteps. "We want to announce a Samadhan scheme for pending sales tax cases in which Rs2,500 crore is stuck," he says. "This should help us out for now."

That apart, there is no real effort to seek a long-term solution for the state's dwindling finances. For instance, there is no talk of cutting losses, even if the decision is political. Of the 31 state milk schemes, 24 are in the red with losses totalling over Rs 66.5 crore. Yet, the Government is raising procurement prices without a price hike. Also myopic is the freeze on the prices of five essential commodities -- rice, wheat, sugar, edible oil and tur dal -- which the Government subsidises for the poor. Instead of pegging the prices at a lower differential, it has frozen the prices, leading to a rising outflow, pegged at Rs 217 crore this year.

The Government's much-vaunted programme to privatise pses is also stuck in a quagmire of counter pressures from trade unions and bidders who are looking to strip state assets cheaply. Despite a keen interest shown by the private sector, there is no policy that could help generate huge revenues from its high-worth assets. Even non-controversial proposals with revenue potential are being ignored. Telecom companies have been asking the Government to lease facilities on the MSEB network or through water supply veins to carry voice and data. This could generate good income. But there has been no response from the Government.

"For a cabinet split on caste, party and regional lines, all these are too progressive even to consider," admits a senior BJP member. Of course, there is some consolation in the fact that Maharashtra is not as badly placed as some other states. But given the Government's penchant for grandiose schemes, the ground is certainly slipping. Like the classic Lewis Caroll scenario, it will take all the running it can do for the Government to stay in the same place. To get anywhere, it will have to run twice as fast.