February 27, 2002


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Arvind Lavakare

State budgets need equal focus

With the national Budget descending on us, the educated of the country will soon be enveloped by a flurry of reactions and recriminations, learned and otherwise. It will be the usual run of the annual Budget season until everyone settles down to his or her life, the politician included.

And so, once again, the nation will have overlooked the fact that the budgets of the federation states -- from Andhra Pradesh to West Bengal -- deserve as much public focus as the Budget of the Union of India. This is so because the states have a crucial role to play in the development process. They bear the responsibility for (i) creating, maintaining and improving social as well as economic infrastructure and (ii) effectively reacting to the changes in national budgetary policies that impact the economic and industrial development of each state.

This vital role of the states is spelt out in several plan schemes of the Union of India wherein allocation of funds by New Delhi to a particular scheme, say rural water supply, is linked to a matching financial contribution from the state concerned.

It is a pity therefore that the politicians, the press and the vox populi of our country are not exposed to the annual study of state budgets prepared by the Reserve Bank of India for some years now on the basis of considerable data. Despite its valuable analysis of the various facets of the finances of each state, this annual RBI publication is ignored even by the pink press that is meant exclusively for business, commerce, financial and industrial aspects of India and the world.

The latest such study, published in January this year, is an eye-opener and a valuable guide for the future. A very disturbing finding of this study is the low degree of self-reliance of these federation states -- a good indicator as any of our states' fiscal instability. Just see the following in respect to the 17 major states about which the relevant data could be gauged.

State Percentage of Own Resources
To Aggregate Expenditure
1990-95 1995-2000
   1. Andhra Pradesh 49.8 45.0
   2. Assam 27.1 25.1
   3. Bihar 30.4 30.4
   4. Gujarat 59.2 58.0
   5. Haryana 69.4 62.7
   6. Himachal Pradesh 19.0 23.0
   7. Jammu & Kashmir 12.7 11.3
   8. Karnataka 56.6 58.4
   9. Kerala 49.7 51.4
 10. Madhya Pradesh 46.9 46.4
 11. Maharashtra 62.6 60.6
 12. Orissa 28.7 27.3
 13. Punjab 53.9 53.7
 14. Rajasthan 42.1 40.1
 15. Tamil Nadu 52.8 57.3
 16. Uttar Pradesh 33.4 33.0
 17. West Bengal 41.8 34.0

The above statistics prove that barring Haryana and Maharashtra, all the other 15 states have lived much beyond their means in the last two decades. The dismal figure of 11.3 per cent during 1995-2000 for Jammu & Kashmir tells its own tale about a state whose government has the audacity to demand autonomy short of azadi -- probably hoping to live on that mythical Kashmiriyat and the salubrious air of the valley, paid for by the country's taxpayer.

Another sign of the profligacy of the states is their rising debt in relation to their Gross Domestic Product. The RBI study found that the debt/GDP ratio of the states has risen in the last five years from 17.8 per cent to an estimated 23.9 per cent in 2001-02.

As to how quickly bad governance can lead to a financial crisis in a state is revealed by the latest position of Maharashtra and Kerala. Thus, according to a front-page report in The Times of India of February 22, 2002, the Maharashtra government's revenue deficit has risen from Rs 6.09 billion in 1995-96 to Rs 62.24 billion in 2000-01; the state's expenditure doubled from Rs 213.76 billion in 1995-96 to a projected Rs 422.68 billion in 2001-02. Kerala's commercial agricultural economy has reeled under the WTO policy and uncontrolled government expenditure, especially on employees' salary, leaving the state with money only to pay salaries, but not pensions to poor widows; its public debt stands at an astronomical Rs 240 billion.

No wonder history was created when the RBI recently directed the Kerala government to shut down its treasury. It seems that Punjab, a proud and largely self-sufficient economy once, is also about to be bankrupt.

As a matter of fact, points out the RBI study, the fiscal position of our state governments has been under stress since the mid-eighties. While the gross fiscal deficit has been quite high, a very high proportion of the same has resulted from a revenue deficit.

The states' fiscal stress stems from the inadequacy of receipts in meeting the growing expenditure. The level of resource flow to the states is determined by the efforts of the states in generating their own resources as well as resource transfers from the Centre. The declining tax and non-tax/GDP ratios have, says the RBI, adversely affected the financial position of the states. Internal resource mobilisation has been further constrained because the state public-sector undertakings, especially the electricity boards and transport undertakings, have been incurring losses, thereby putting further pressure on resources.

While state government budgets of 2001-02 have generally proposed a number of measures reflecting the urgency to expedite the fiscal consolidation process, the success of these measures will depend almost entirely on the political will of the government concerned and conviction in the belief that when all is said and done politics is essentially economics. The truth that stares the states in the face is that old one from Alice in Wonderland: since it takes all the running you can do to stay in the same place, you have to run twice as fast to move ahead.

To do that, the states will have to devise measures aiming at much better collection of existing taxes, widening the tax base, rationalising user charges, better targeting of subsidies, comprehensive restructuring of state-level public undertakings and rationalisation as well as prioritisation of expenditure.

The above path will be possible to traverse only if we have chief ministers who understand economic issues in some depth, who are tough as well as transparent, imaginative as well as immune to populism, down-to-earth as well as devoted to hard work. In short, they must be prepared to resist populist pressures so much as to be ready to be kicked out by a stupid public in the next election. Is that a mirage in Indian politics?

The greater the pity therefore that our national Budget obsession precludes an answer to that billion-dollar question.

Arvind Lavakare

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