However, New Delhi has not spelt out the raison d'etre of the new reference.Yes, something needs to be done about the fiscal deficit of the states. Theold style gap-filling by the Centre has reached the end of its tether: theCentre has to cope with a high mega fiscal deficit. But to pressurise thestates to mend their finances via conditionality (``linked to progress inthe implementation of the programme'') cannot but be viewed with askance.

Grants are an entitlement. The states can use the entitlement as theyplease: they are politically accountable (for wise or unwise expenditure) totheir electorates. Conditional grants will make the states accountable tothe Centre. Besides, grants may be denied on the ground ofconditionality-failure. Political discrimination can influence the flow ofgrants: how can this be ruled out?

It would have been a different matter if the Centre had discussed theconditionality issue with the states, explained how priorities in states'developmental spending will be protected by conditionality: spendingpriorities will be decided by the states in consultation with the planningcommission; it will be hands-off by the Centre. But can this be the scenariowhen New Delhi fights shy of consulting the states on a matter in which theyshould clearly be the prime movers? If grants are tied, funds will bededicated to specific projects.

In a situation where tax and non tax revenues are less than buoyant, thediscretionary pool of resources available to the states for spending willbecome tight. Consequently, the states will have to review (prioritise)expenditure: downsize bureaucracy, choke subsidies, switch spendings, takeunpopular decisions (for example) to raise power tariffs (as Andhra Pradeshhas done). These hard measures are necessary to restore the developmentinitiative; the alternative for the states is to go the way of Bihar (wheredevelopmental spending has virtually stopped).

The temptation to use EFC to force the pace of reform is strong. Assuming itgoes along with the Centre, constitutional amendments will be required. Butshould EFC be used to direct economic policy, including how states shouldsequence their reform agenda? Of immediate relevance is the question whetherEFC pressure should be put on the states. They are already sweating from therise in interest outgo on public debt, the heavy burden of post-paycommission remuneration to the bureaucracy, the shrinkage in their capacityto guarantee returns to investors, inadequate investment growth in moststates: the states will reform (Madhya Pradesh has decided to downsize thebureaucracy) sooner than later, and tighten fiscal deficits on their own; atstake is their credibility in the market which subscribes to states'borrowings.