Management of States' finances

By V. Jayanth

AT A time when the finances of State Governments are coming under intense scrutiny, some States have opted for increased transparency on the fiscal status. Andhra Pradesh and Karnataka are a couple of States which have released White Papers on their finances and focussed on the problems ahead. In the case of Andhra Pradesh, despite a White Paper and a constant review, things have not improved. The Comptroller and Auditor General (CAG) has been quite critical about the management of the State's finances. The Chandrababu Naidu Government is pondering over the CAG report and trying to come to grips with the burden of subsidies and populist schemes.

The Centre, especially the Finance Minister, Mr. Yashwant Sinha, is taking a critical look at the State finances, even as the Planning Commission is trying to reorient its exercise of fixing the Annual Plan outlays for the States. Individual Union Ministries, Power for instance, are coming down heavily on State Governments and State Electricity Boards (SEBs) who have not been able to pay their dues to the Central energy agencies such as the NTPC.

Not to be left out, the RBI too wants to review the debt burden of the States, so that they do not get into a debt trap or resort to repeated ways and means loans or temporary overdrafts. The RBI has set up a working group of Finance Secretaries to go into the problem of interest burden of the State Governments. It also plans to constitute a task force to go into the extent of manoeuverability available in budget-making for the States. The RBI will provide technical and secretarial support to these groups to carry out the assignment.

But the best move on this front could well be from the Planning Commission. It must follow up on the suggestion for making the States' Plans more realistic and workable. It has suggested that instead of the States officials and finally Chief Ministers/Finance Ministers going to New Delhi to finalise the Annual Plan, the Commission could depute a team to visit the States and evolve pragmatic Plans.

The Deputy Chairman, Mr. K. C. Pant, has adopted a pragmatic approach to finalising the Annual Plan outlays for the States this year. He must carry this process forward to launch a joint exercise with the State administrations to monitor and review the Plans' implementation to ensure full utilisation. The present practice seems to be first to fix a five-year Plan allocation and then spread it over the years on an incremental basis. It works out to a 5 to 10 per cent annual increase in Plan size for States, depending on their capacity to mobilise resources. But the Planning Commission must be able to review the progress to prevent any diversion of funds to non-Plan expenditure and ensure there is no non-utilisation or under-utilisation of allocated funds, which will only deprive other States or projects of much needed and scarce resources.

Hence the suggestion from the Planning Commission, that there should be a mid-year review with the State Governments on Plan implementation. If this review is done by September-October, it may be possible to either pump in more funds to complete essential projects in a State, or divert money to other States if one of them is unable to absorb it.

Uttar Pradesh and Punjab have emerged as classic examples of States facing a major financial crisis - where expenditure has outstripped revenue collections. Thanks to huge subsidies, a flabby administration, steady decline in revenues (especially non-tax revenue), the States have not been able to pay their employees in time. The U.P. Electricity Board even threatened to cut off power supply to the residence of the Chief Minister in Lucknow and to the Raj Bhavan because of the huge arrears. The State could not pay till March 31 because it had no funds.

Andhra Pradesh has gone through a turbulent year or two in its finances, frequently resorting to ways and means loans, overdrafts with the RBI and an SOS to the Centre for urgent assistance or grants. The recently- tabled CAG report once again focusses attention on the delicate financial situation in Hyderabad, now being called Cyberabad. The CAG report for 1998-99 warned: ``The revenue and fiscal deficits have shown an increasing trend over the past five years, from Rs. 728 crores to Rs. 2,684 crores; and Rs. 2,349 crores to Rs. 5,705 crores respectively.''It says the State Government took recourse to ways and means advances and overdraft more often than earlier years; the State also raised an amount of Rs. 115.85 crores from Government companies/corporations and postponed the repayment of Central loans aggregating to Rs. 1,770.48 crores, due between July 1998 and March 1999 and actually repaid in April 1999. The Government depended on borrowings to meet its Plan expenditure, except for 1997-98.

Karnataka's recent White Paper on State finances highlights the areas of concern not just in Bangalore, but for all the States, because they seem to be facing the same problems. The paper makes it clear: ``There has been a marked deterioration in the finances of the State... In recent years, serious erosion is observed in fiscal health of the State Governments in general and Karnataka is no exception... Immediate corrective measures are necessary to restore fiscal health and to ensure that Karnataka continues to be a favoured destination for investments''.

According to the White Paper, the per capita Gross State Domestic Product (GSDP) in 1997-98, at Rs. 3,073 was lower than the average of the country, Rs. 3,251. Per capita household consumption was also lower, by four per cent in rural and six per cent in urban areas. It notes that Government revenues were stagnant and inadequate to meet expanding expenditure commitments. ``The widening imbalance between revenue and expenditures has diverted borrowed funds to meet unproductive expenditures. This has created a vicious cycle of deficit-induced borrowings, interest payments and increase in indebtedness.''The state of the Public Sector Undertakings (PSUs), especially the SEBs, and the uneconomic pricing of utilities or services have been identified as the main reasons for the financial mess most States find themselves in. Of course, the salary burden has increased tremendously with the implementation of the Fifth Pay Commission's recommendations.

In Karnataka, the explicit subsidy to the SEB in 1998-99 was a whopping Rs. 914 crores - making up almost three-fourths of the revenue deficit of the State Government. Wiping out the losses of the SEB alone can reduce its deficit by 75 per cent, which means cutting down on free and subsidised power. The CAG reports on Tamil Nadu run on similar lines - the financial position of the State shows ``decline in relative share of revenue receipts, increased borrowing and depletion of cash balance''. There was a substantial increase in revenue deficit and the ratio of revenue deficit to fiscal deficit increased, indicating that the debt burden was increasing without adding to the repayment capacity of the State.

This kind of a periodic assessment of a State's finances makes the solutions obvious - phasing out subsidies; economic pricing of services; corporatisation or privatisation of PSUs; a freeze on recruitment along with re-training and re-deployment of surplus staff; downsizing the administration by closing down redundant departments and merging related ones. There must be a conscious cutting down of wasteful expenditure and public borrowings, except for specific projects.

The States must augment revenues, focus on infrastructure development and involvement of the private sector. It needs a political will to take the tough decisions. For this to happen, there must be a national consensus among major political parties at least on fiscal discipline and economic policies.

While the top five States are actively competing to attract foreign and domestic investments, the financially-vulnerable States are competing to increase subsidies and introducing more populist schemes. If a State cannot manage and balance its resources, it cannot expect the Centre or the RBI to bail it out every time it is in a soup.

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