The Hindu : Tamil Nadu News : `Medium-income States can achieve stability'

Online edition of India's National Newspaper
Wednesday, Dec 22, 2004

Tamil Nadu

Tamil Nadu

`Medium-income States can achieve stability'

By Our Special Correspondent

CHENNAI, DEC. 21 . "Medium and high-income States like Tamil Nadu are in a stronger fiscal position than the poorer States, and if they continue with fiscal reforms, they should be able to achieve fiscal stability and spend more in priority areas," the World Bank's Lead Economist for India, Stephen Howes, said today.

He said the bank had done extensive work in State fiscal reforms and helped several States improve their performance. It prepared 12 reports on nine States and extended Structural Adjustment loans to five of them. As it was time for stocktaking, the bank had come out with a report on "State Fiscal Reforms in India: Progress and Prospects," which he launched here in a joint discussion-workshop with the Madras School of Economics (MSE).

This report covered the 16 large States, leaving out the North-eastern States and the Union Territories. Mr. Howes said that despite a "reform fatigue," most of the States realised that fiscal reforms were imperative to increase development spending. Tamil Nadu, one of the five States to go in for a Fiscal Responsibility Act, had even come up with a half-yearly report on its finances.

Mr. Howes said 1998 was the turning point, when, with the implementation of the Fifth Pay Commission's recommendations, most of the States ran into a financial crisis. The fiscal deficit of even the financially better off States breached the 4-per cent barrier. Only now, there were signs of the deficit narrowing.

Emphasising the role of the Centre in fiscal reforms and stabilisation, Mr. Howes said there were several crucial State-level reforms that required Central leadership — the important among them being the shift to Value Added Tax (VAT). The focus of VAT must be on floor rates rather than uniform rates to avoid revenue loss to the States, preserve tax autonomy and minimise the need for compensation. The transfer of services to the States should be accelerated, and "the phasing out of the distortionary and inequitable Central Sales Tax will require both Central and State legislation."

Highlighting the "practitioner's perspective," Tamil Nadu's Special Secretary for Finance, L. Krishnan, said "vested interests" had a positive role to play and without that, these interests could be "trampled." The political executive was very keen on reforms, but political parties had to contend with frequent elections, coalition interests and competitive politics. Reforms were still viewed with suspicion.

A. Rangachari, former IMF budget advisor, said the basic problem with the budget was that it looked at the economy in financial terms and not in terms of output. R. Raghuttama Rao, executive director and chief consulting officer, ICRA advisory services, said tax reforms were the key to improving competitiveness in the manufacturing sector.

K.R. Shanmugham, associate professor, MSE, said Tamil Nadu adhered to the Medium Term Fiscal Programme it had enacted last year.

U. Sankar, honorary professor, MSE, said the World Bank report did not address pollution of natural resources, State autonomy and subsidies adequately.

Sunder Ramaswamy, director, MSE, who moderated, said the institution hoped to have more such interactions on issues of national importance.

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