Fiscal Situation Of The States

 West Bengal Perspective

A meeting of the prime minister with the chief ministers on fiscal situation  of the states was held on October 18. Views of the government of West Bengal were presented by Dr Asim K Dasgupta, finance minister of the state.

 Following are the excerpts from the written note presented by Dr Dasgupta. His note provides an analysis of the causes behind the present financial problems of all the states and deals with remedial measures to improve the fiscal situation.

  Causes Behind The Present

Financial Problems Of The States

 IN our view, there are seven major causes behind the present financial problems for all the states.

The first cause has originated from the decision of the government of India on pay revision on the recommendations of the Fifth Central Pay Commission, and its widespread effect in terms of subsequent decisions of the state government beginning 1997-98. In consequence, expenditure on salary and pension has doubled for both the centre and the states over the last five years. Remedial actions are necessary for reducing effectively this pay revision burden.

It is with this in view that a demand was seriously and unanimously raised by all the states, and was discussed in the meeting of National Development Council (February, 1999). Since the root cause has been the central decision, and since the central government has always been accommodated by the Reserve Bank of India (RBI) in financing the revenue expenditure, the states, it was discussed, should be provided with a special ways and means advance from the Reserve Bank of India (thus without straining the centre’s budgetary resources) for only half of the additional burden of pay revision for a period of five years.  The states, in turn, would take steps to reduce revenue deficit as proportion of revenue receipts. Although all the states have taken steps, with definite results in terms of reduction in the proportion of revenue deficit to revenue receipts, no additional assistance in terms of special ways and means advance for half of the additional burden of pay revision has yet been obtained. Some effective package of remedial measures to redress this problem of burden of pay revision is, therefore, urgently necessary.

The second major cause is related to the mounting debt burden of the states, created from the specific policies of the central government. It may be noted that more than 60 per cent of all the states’ loans are central loans because of unfair central policies. It is indeed unjust that several forms of so-called central assistance to the states have now been primarily or totally in terms of loans at a very high rate of interest (e. g. Central Plan Assistance, RIDF programmes, Accelerated Irrigation Benefit programmes etc.). At present, the average interest cost of all borrowings by the centre is only 7 per cent, but the average interest charged by the centre on loans to the states is as high as 12 per cent.  The interest burden on the states, on average, has doubled over the last five years.  Given the nature of loan burden of the states, the earlier Finance Commissions (upto the Eighth Commission) had always recognised this problem, and had given debt relief to the states. But, unfortunately, no effective debt relief has been provided by any of the last three Finance Commissions, i.e., over the period of last fifteen years, and that has further aggravated the debt burden of the states.

This is the general nature of the problem of debt burden for all the states. But this problem has assumed a further dimension for a state, like West Bengal, for two specific additional reasons which are again related to the central policies and decisions.  First, West Bengal is one of those states which have taken the national savings programme seriously and achieved first position in implementing the programme. But due to the policy of the centre, this success has resulted in an imposed debt burden on the state. According to the central policy on small savings, even when a net surplus is generated in the states after deducting withdrawal of deposits from gross small savings collection, this surplus, instead of being shared with the states as grants, is again passed on to the states as loans at a high rate of interest. As a result, success of small savings programme in states like West Bengal has been turned to an additional debt problem for the state, now causing as high as 50 per cent of the state’s total debt burden. Secondly, in the year 2000-01, the state was severely affected by the worst flood over the last one hundred years. Although, the government of India had recognised this flood as a national calamity, yet only Rs 103 crore was provided from the National Calamity Fund against the state’s justified requirement of Rs 1,487 crore for purposes of relief and restoration. The state government was forced to take an additional loan of Rs 1,173 crore from HUDCO to fill up this massive gap in the requirement for restoration of infrastructure. There is an urgent need for redressal of the debt problem for all the states, including the problems related to small savings programme and those related to national calamity related loans.

Of late, there has been a third disturbing cause due to a significant shortfall of nearly Rs 10,000 crore from the budgetary figures in the central devolution of the state’s share of taxes for all the states in 2001-2002, with only half of this shortfall compensated by allowing additional market borrowing to the states. For West Bengal, this shortfall has been to the tune of Rs 736 crore. This shortfall, it is held, is due to the overall recession in the country.

Fourthly, because of the overall recession, again, there has been a shortfall in the collection of revenues of the states, particularly that of sales tax in most of the states. For West Bengal this shortfall has been at least Rs 600 crore in 2001-2002.

In the midst of this difficult financial situation, as a fifth aggravating factor, the Reserve Bank has recently started imposing unjustified restriction on all the state’s access to limited credit from financial institutions even for loans agreed to by the Planning Commission, and even when the financial institutions and banks have adequate loanable funds.

Without correcting these distortions, the Reserve Bank’s existing Overdraft Regulation Scheme for the states, and the practice of dishonouring the cheques of only the states has been a sixth causal factor behind the financial problems of the states, and are indicative of applying double standards between the centre and states. It is specially relevant to note here that in terms of the data (2001-2002) published by the Reserve Bank of India, the states, taken together, have a higher annual total budget (Rs 4.01 lakh crore) than the centre (Rs 3.87 lakh crore) and also a higher development expenditure (Rs 2.34 lakh crore) than the centre (Rs 1.57 lakh crore), and yet they have a much less revenue deficit (Rs. 48,000 crore) than the centre (Rs 80,000 crore). In other words, relatively speaking, the states have a much better record of development expenditure and financial management than the centre. It only stands to reason, therefore, that the credit facilities extended by the Reserve Bank to the centre to clear its overdraft should be at least partly extended to the states to overcome their ways and means problems. At present, borrowing facility extended by the Reserve Bank of India to the central government is about Rs 80,000 crore per year, and that to all the states only Rs 13,000 crore. If only an additional credit facility of Rs 10,000 crore is extended to the states on the basis of a fair principle, taking into account specific problems of the states, then the present unfair and one-sided practice of dishonouring only the cheques of the state governments can be stopped. This additional annual credit facility for the states will be less than 0.5 per cent of the Gross Domestic Product, and will not have any significant impact on inflation.  Moreover, we also observe that out of the total deposit of Rs 10.97 lakh crore in the scheduled commercial banks in our country, only a sum of Rs 6.84 lakh crore could be advanced as credit as on March 31, 2002, indicating enough space in credit-disbursement in the present situation in the economy. In such a situation, an additional loan facility of Rs 10,000 crore will be less than 1.5 per cent of the overall credit facility extended in the country, and will not have any “crowding out” effect on private investment, or any effect on rate of interest. On the contrary, this additional credit facility in the present national scenario of demand-deficiency recession may have a positive multiplier effect in the economy.

Along with these six causes, there is a seventh cause with a negative impact on the states’ finances. Not only have the Centrally Sponsored Schemes in the State List (as well as the Panchayat and Municipality Lists) not yet been transferred to the states with funds despite the consensus in the Chief Ministers’ Conference six years ago, funds of several important Centrally Sponsored Schemes are now being placed outside the Consolidated Fund of the States, and in the bank accounts or in the suddenly created registered societies. Similarly, funds under several external loans or assistance are also being placed outside the accounts of the state governments. This practice is not only a deviation from the Constitutional provisions, it is also creating a serious problem in overall financial monitoring and management for the state governments.

As a collective consequence of these seven major causes, along with the pre-existing centralising distortions in the centre-state relations, the states are now in the midst of serious financial problems.

(Remedial Measures suggested by the West Bengal government will be carried in the next issue - Ed)