Focus must shift to the States

By S. Swaminathan

Whether it is the quasi-federal structure of the polity or the obsessive pursuit of Centre-dominated economic planning during the first four decades of independence which caused it, the Indian economy is today characterised by a deep chasm between a few developed States and many States wallowing in under- development. The onset of liberalisation process has only worsened the situation.

As Mr. Arun Shourie, Minister of State in the Ministry of Planning, informed Parliament recently, ``The range of variation between the slowest and the fastest growing States in the 1980s was from 3.6 per cent per year in Kerala to 6.6 per cent in Rajasthan, a factor of less than 2. The range increased substantially in the 1990s from a low of 2.7 per cent per year for Bihar, to a high of 9.6 per cent for Gujarat, a factor exceeding 3.5. Comparing Bihar's per capita growth rate with that of Gujarat in the 1990s, the ratio between the lowest and the highest is as high as 1:7.''

There are two implications here. The first is that the system of planning (premised on spatial distribution of public sector investments as an equilibrating factor) was nowhere near achieving the desired end. The second is that when once competitive bidding for private sector investments in the post- liberalisation phase began, it has simply been a case of the ``rich'' States becoming richer and the poor States languishing further.

Conventional remedies

Paradoxical as it may seem, the glaring economic disparities as between Bihar and Maharashtra, for example, are not the consequences of enormous differences in resource endowments, with Bihar abounding in coal and other mineral resources as compared to Maharashtra. Nor does an explanation for the disparity lie in any niggardliness of Central investments in Bihar during the epic period of planning (1950-1980) as contrasted with the dispensation accorded to Maharashtra.

The argument that the devolution of Central funds to the States could itself operate against regional disparities has been proved to be fragile if only Bihar's unenviable record is not regarded as a bizarre exception. Dr. Raja Chelliah seems to consider the traditional line followed by successive Finance Commissions in regard to ``gap-filling'' of deficits of State governments on non-Plan revenue account itself as a factor contributing to accumulated fiscal deficits at the state level. However his criticism of the Eleventh Finance Commission's approach - of broadly tilting the scales in favour of the backward States - appears to be flawed in as much as Dr. Chelliah himself advocates more substantial although conditional assistance by the Centre to the most backward States such as Bihar, Orissa and Uttar Pradesh for helping them carry out major developmental projects. That there has been little of meaningful and constructive dialogue between the Centre and the backward States on the need to help them emerge from abysmal conditions especially of infrastructure, law and order and the system of governance (underscoring accountability) has remained a costly lapse of the country's development agenda.

Non-performing States

In a recent statement made in Parliament, Mr. Shourie revealed that most States have not been able to fully utilise the outlays approved by the Planning Commission.

What is even more distressing, not only the BIMARU States but also West Bengal and Orissa were not able to achieve their Plan outlays for the last three years. How much of the shortfalls was due to the resources crunch of the State governments and how much due to inefficiency of implementation of projects is a question which deserves serious examination if only for ensuring that in future, these States do not permit essential projects to go abegging.

Under a system of ``federal fiscalism'', while the Centre seems to be loaded with obligations to devolve funds in favour of the States, the latter do not seem to be under any discipline in the matter of applying funds for the intended projects or of ensuring reasonable levels of performance for the funds spent. If the reports of the Comptroller and Auditor-General, on several States embody a common message, it is that the so-called backward States indulge in indiscriminate diversion of ``plan funds'' to meet routine expenditure on the revenue account, especially salaries for the staff.

States must mend their ways

Dr. Y. V. Reddy, Deputy Governor of the Reserve Bank of India, has rightly pointed out recently that the major focus of fiscal responsibility has shifted to the States from the Centre. All the attention hitherto has been on containment of the fiscal deficit of the Centre. The fact that broadly 44 per cent of the total expenditure of the Centre takes the form of ``resources transferred to the States'' makes it obvious that the fiscal mess of the States is what feeds into the Centre's fiscal deficit. A surfeit of advice to the States on how they could correct their fiscal distortions has filled the debate on the subject. Yet, the hard reality is that few State governments have shown the willingness to augment their revenue resources (by taxing agricultural income in the top brackets and by recovery of user charges in electricity and water) or to rationalise their spending pattern much less to wind up scores of redundant public enterprises.

What distortion is this that in the name of ``fiscal federalism'', State governments get away from their basic obligations of developing infrastructure and providing entitlements to citizens in the form of education, medicare, safe drinking water, road connectivity and dwelling on the specious plea that the Centre is not providing enough funds through the devolution route? The suggestions made by Dr. Montek Singh Ahluwalia, member of the Planning Commission, that it is time that ``policy conditionalities'' of a transparent order be linked to the process of devolution of funds, is extremely significant. ``The business as usual'' approach will only encourage State governments to lapse further in the abyss of financial bankruptcy.

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