The Reserve Bank has decided to let the states raise a certain proportion of the market borrowings they are allowed at market related interest rates. This flexibility will allow the states to offer lower coupon rates in consonance with the decline in these rates for central loans. This is a desirable reform, but its impact on the rising interest burden of the states will be marginal. The debt burden of the states has been rising rapidly. Their gross fiscal deficit for 1996-97 was a high 3.31 per cent of GDP. The reckoning is that for 1997-98 the fiscal deficit will rise above the targeted 3.14 per cent. The deficit is covered by small savings, besides market borrowings and loans from the central government.In absolute terms, the annual gross fiscal deficit of the states is of the order of Rs 45,000 crore; a third of this is the revenue deficit. Possibly, the states share of revenue from the voluntary disclosure scheme will help to reduce the size of their deficit in the coming year. However, theimplementation of the pay commission report will make a staggering impact on state finances. The estimated annual burden of all states is not less than Rs 20,000 crore a year. In one shot, the fiscal deficit will spurt by over 40 per cent.
The issue has not received the attention it deserves because of the rapid change in the political scenario. Soon after liberal payments to the bureaucracy were announced, the rug was pulled from under the feet of the UF government at the centre. Then came the preparations for the elections and the uncertainty over their outcome. Among the political parties, only the UF seems to be aware of the problem of keeping the state-level bureaucracy in humour. It has asked for central assistance! A centre-states tussle is on the cards. The states can only absorb the cost of lavish payments to the bureaucracy by cutting down development expenditure on education, health, social services, and last but not the least on roads other than national highways. (Already their capitalexpenditure is less than a fourth of their revenue expenditure). It will be a bureaucracy-versus-the-people choice for the states. More. The states cannot afford to be lackadaisical about the growth of subsidies to irrigation, power and road transport. The states have to take hard decisions. In a regime of unstable politics, they cannot get much mileage out of a confrontation with the centre.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
