Wednesday, Oct 23, 2002
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By Prem Shankar Jha
One does not know whether to feel sorry for, or be relieved by, the abject failure of the one-day meeting of State chief ministers with the Union Finance Minister in Delhi last week. This was the first time that the Centre and the States had met with the specific purpose of finding ways to reverse the mounting indebtedness of the State governments. The importance of the meeting was underlined by Atal Behari Vajpayee who called it a `major milestone,' and underlined the fact that the country would not be able to achieve a higher rate of growth if it did not bring down the ratio of public debt to the GDP. Where the conference proved a resounding flop was in the measures that were actually proposed and discussed. Not even one of them was aimed at tackling the root cause of the growing debt — the fact that both at the Centre and in the States expenditure now far outstrips revenue. Instead nearly all the measures proposed were intended to merely postpone the day of reckoning. The conference therefore degenerated into a quest for soft options despite the fact that most of these no longer exist. A cursory look at State government finances shows that, without exception, all of them are bankrupt. Their combined expenditure exceeds their income from all sources by 22.5 per cent. To cover this they have raided, and in many cases exhausted, their employees' pension and provident funds and have been circumventing Central Government mandated limits to their borrowing in a variety of innovative ways. As a result while their authorised debt — which is incurred through, and therefore owed to, the Central Government — amounted to Rs. 247,030 crores in March 2002, their total debt exceeded Rs. 580,000 crores. The interest on this debt has swallowed up most of their revenues and is forcing them further and further into debt. It is therefore not surprising that there has been no capital component to States' development expenditures for several years. While the States have been headed towards bankruptcy ever since the early 1980s, what tipped them suddenly over the brink was the need to match the increase in salaries and pensions awarded to Central government employees by the Fifth Pay Commission and accepted by the United Government with handsome add-ons in September 1997. Thus all of them face the imperative need to cut down their expenditures sharply and increase their revenues. Unfortunately, few of the proposals that came up for discussion broached this task in any organised way. The only Central proposals that met with approval in principle were those that aimed to swap high cost old State government debt with low cost new debt. When completed over a period of several years, this would reduce the interest burden of the State governments by about one third. During the conference many States raised objections to the details of the proposed schemes which resulted in their being sent back to the drawing board. But even when the glitches are ironed out, a debt swap will only slow down the States' descent into bankruptcy. This is because in nearly all States' primary expenditures (current expenditure minus interest payments) exceed current revenues. Their total debt will therefore continue to rise irrespective of any decline in the cost of old debt. To reduce primary expenditures, and therefore the primary deficit, the Central Government proposed a freeze in dearness allowances (cost of living adjustment) for all 14 million State government employees, and in a variety of perquisites such as the annual bonus, leave travel allowance, and the right to commute half the pension. But most State governments shied away from these measures because of their discriminatory nature and political unpopularity. There was thus no consensus.The States too came with a bundle of proposals, but these were even further away from tackling their core problem. These included paying Central grants for Centrally sponsored development schemes into the States' treasury and letting them dole the money out to the project authorities and increasing their overdraft facilities. The first, which the Centre accepted, is fraught with the risk that still more Central development funds will be diverted to cover States' infructuous revenue deficits. As for the second, as the States are already bankrupt, the overdrafts will remain unpaid or be covered by still more `innovative' borrowing. The conference did not endorse a single measure that would actually cut expenditure or raise revenues. It did not discuss improving the collection of electricity dues or making State transport viable. Nor did it discuss the alternative of privatising both functions within an accelerated timeframe. Most inexplicable of all, it did not discuss the surest and fastest way of cutting down primary expenditure on salaries and pensions, which is to raise the retirement age of civil servants, for all 14 million State government employees as has been done in almost every country in the world. As a result while pensions had to be paid for an average of 11 years to every employee in the Fifties, today they are having to be paid for almost 20 years.
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