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Business Commentary/Arvind Lavakare

Racy politics, messy economies

Sow the wind and reap the whirlwind. That's what has happened to the finances of India's state governments.

All these long years and more, each state government has indulged in various types of free lunches, victims of populism, unconscious or unmindful that no one can perpetually live beyond one's means.

The financial disaster staring them in the face comes loud and clear in the Reserve Bank of India report entitled Finances of State Governments, 1998-99, released recently.

The sheer numbers in that report make very grim reading -- for those who think about economics and for those who can see beyond their nose.

Thus, the gross fiscal deficit -- shortfall in income required to meet projected expenditure on both capital and revenue account -- of all state governments in the aggregate has gone up from Rs 404.69 billion in 1995-96 to a projected Rs 598 billion for the year ended March 31, 1999.

This quantum of GFD is an extreme cause for worry -- for the country's central bank but not for the state governments themselves and not for the nation's media either, judging by the silence of the two entities on the deadly RBI document.

The aggregate revenue deficit of all the states put together for 1998-99 is anticipated at Rs 264 billion, amounting to 1.6 per cent of the GDP. This is nearly 34 per cent higher than the revenue deficit in just the previous year, 1997-98.

This sharp deterioration on the revenue account is because of the deceleration of revenue receipts of state-level taxes and the increasing expenditure on the administrative machinery of the states. Indeed, in 1998-99, lower collections of sales tax (levied exclusively by the state governments) contributed to the increased revenue deficit.

That is why, nearly all the states fund their developmental plans by deficits as was pointed in a separate report of the Planning Commission submitted to the prime minister in January this year.

Since the collective debt burden of the state governments had already crossed 25 per cent of their revenue, the Planning Commission dubbed the situation as untenable and suggested that the state governments would have to rely on their own means to redress their financial mess.

But the state governments are hardly listening to this common sense stuff. Chief ministers like Nara Chandrababu Naidu of Andhra Pradesh and Jyoti Basu of West Bengal have pointed out that they cannot do much about the runaway deficit and that the Centre will have to augment its existing allocation for what really amounts to their profligacy.

They say that the gross deficit is created by unavoidable expansion in the expenditure on the state bureaucracies (especially rising salaries consequent to the Fifth Pay Commission award), a number of subsidies at the state level ranging across drinking water and irrigation, electricity, education etc. Two horrors of note are Bihar and Uttar Pradesh where almost the entire revenue expenditure of the state government is incurred on the salaries of their bureaucracies.

Naidu and Basu -- two of our most headlines-hogging chief ministers -- throwing up their hands on such a life-and-death issue is a poor commentary on their ability at governance.

Naidu has spent helluva time and energy on creating a halo of cyberspace around himself; he has also lectured often enough to the Bharatia Janata Party-led coalition in the capital and frequently proclaimed his commitment to Hyderabad in preference to a seat of power in Delhi.

But the man has, we must conclude, no ideas or no guts to alleviate the financial sickness of his state. What kind of a chief executive officer is such a chief minister?

And Jyoti Basu of "barbaric" fame. Forever ruing the "historic blunder" which his Commie comrades committed by denying him the nation's prime ministership in 1996, forever willing to kowtow to Sonia Gandhi and sundry others for the purpose of bringing down the "barbaric" Vajpayee-led government, the bhadralok does not have wits enough and spunk enough to bring down West Bengal's ballooning financial deficits. What kind of a so-called Titan is this from the land of Amartya Sen?

It is time that Naidu and Basu took lessons from two relatively less-known chief ministers, Digivijay Singh of Madhya Pradesh and Parkash Singh Badal of Punjab, who have now put on their economic caps.

The former, an engineer by qualification, is all set to introduce some forward-looking ideas to save his state from the emerging debt trap. He is ready with the golden handshake for the state employees as well as with some austerity measures such as withdrawal of ministerial status granted to non-officials, curtailment of use of state airplanes and cars, imposition of ceiling on telephone bills and petrol expenses of ministers, reduction of expenses on state functions, ban on tours abroad, on lunches/dinners at government cost and on extension of service to retiring employees.

Badal, a pragmatic agriculturist basically, announced the other day a reduction of subsidies to the extent of Rs 4.5 billion and an increase in the user charges for public services as well an involvement of private enterprise in economic development -- all with a view to covering the proposed deficit of Rs 9.9 billion in Punjab's budget for 1999-2000.

Sadly and ironically, Maharashtra, home of many a financial wizard, last week presented a budget with an unprecedented deficit of Rs 10.95 billion in spite of new taxation of Rs 0.72 billion and "tightening of fiscal measures" which went unexplained in their financial impact. What's more, there are reports that the state government is going to soon recruit some 20,000 new employees, though, like any other state government, there is strong reason to believe that what is really needed is retrenchment of surplus.

Clearly, time has come for Indian politicians to realise, once and for all, that good politics is really good economics and that meek surrender to vote banks is the surest road to financial liquidation.

Good economics, in turn, means that citizens must be made to understand that they not only have rights but also obligations -- financial obligations whereby each one pays his dues largely commensurate with his ability so that the state has a whole can create more and more opportunities for economic growth.

Good economics means there are no free lunches except for the really destitute who, of course, must be given the avenues to break out of the "free lunch" category. Good economics, lastly, means efficient administration that understands the importance of cash flows in the state exchequer and of saving every state rupee possible.

To give a few examples of bad financial governance in Maharashtra:

1. The government's notice for the payment of the annual motor vehicles tax comes almost at the end of the year, thereby delaying receipt of billions of rupees by a year and more.

2. The state electricity board's bills to farmers are sent several months after the period of energy consumption, adversely affecting the cash flow of an institution already financially strapped because of the heavily subsidised rates charged to farmers, non-payment of bills and considerable theft of energy.

3. Land revenue for farmers has not been revised for the last 50 years or so. Farmers owning up to five acres of land continue to be exempted from paying land revenue that was settled decades ago. Can you believe that a farmer owning about five acres of agricultural land in a particular village I know is levied just 84 paise annually (sic) as land revenue? And even that niggardly amount is not to be paid!

4. Municipal water rates to Bombay's residents are uniformly same for the tenant of a one-room tenement and for those living in self-owned apartments in skyscraper buildings.

Yes, plenty of ideas can be made available to politicians for reducing deficits in their state's financial position. But they are happy in their belief that politics is good business -- their own business of being in power. Nor is the media as a whole adequately oriented to comprehend that economics is invariably at the root of what passes off as politics --- be it conversion to Christianity or be it the demand for reservation of jobs for the Scheduled Castes and Tribes. That dual fact is the tragedy of India.

Arvind Lavakare

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