Business

Development v democracy

By Prem Shankar Jha

New Delhi has a plethora of newspapers, perhaps more than any other capital in the world. But all of them concentrate on reporting `national' news. One unintended by-product of this is a neglect of news from the States. Unless it is an insurgency in Assam, a communal riot in Gujarat, a terrorist killing in Kashmir, or a split in a ruling party that leads to the fall of a Government, such news almost never makes the front pages. More often than not, what is happening in the states simply goes unreported. Yet it is only in the States that one gets an unvarnished picture of the extent to which an increasingly populist democracy is pitting itself against the compulsions of economic development and clouding the future of India.

An excellent example is the lackadaisical or at best sporadic reporting of State finances. The Union Ministry of Finance now regularly presents consolidated data for the finances of all States, taken together, in its annual Economic Survey. So once a year every economic analyst gets a graphic account of the deepening crisis in State finances. Their slide into chronic debt is reflected in the fact that from having balanced budgets till as recently as the mid-1980s, they now account for a fiscal deficit of 4.9 per cent of the GDP. This is almost half of more than 10 per cent consolidated fiscal deficit of the country. But because State budgets are seldom reported, what we get little inkling of is why the States are in such dire straits.

To get this one needs to refer to the regional papers. The picture that emerges is truly frightening. An excellent example was furnished recently by the State budget of Himachal Pradesh. Since Himachal saw the Congress return to power in the February elections, the budget that the Chief Minister, Virbhadra Singh, presented in the last week of June was the Congress' first in six years. It therefore became a litmus test of the new government's intentions.

The Government failed the test miserably. Himachal has been in the red for years. So much so that in recent years it has been running out of money to pay the salaries of its employees well before the year has ended, and has had to resort to borrowing through its state enterprises to avoid going into default. One would have expected the new Government, therefore to make a determined effort to cut consumption expenditure or increase revenues. It has spectacularly failed to do either.

Just how much the government is a prisoner of its own and its successor's past improvidence was reflected by the fact that despite every effort to contain the rise in its expenditure, this is estimated to go up by a full 21 per cent in 2003-04 from Rs. 6,115 crores to Rs. 7,452 crores. But the additional revenue that the Government is expecting to raise through increases in local rates and taxes, amounts to a paltry Rs. 50 crores. Most of the increases in the budgetary gap will be met by an increase in Central assistance. In this, Himachal is luckier than most states because, despite the fact that it now has one of the highest literacy rates and per capita incomes in the country, it gets 90 per cent of its central assistance in the form of grants because it is still classified, as it was 40 years ago, as a backward State.

But Himachal's burgeoning expenditures have left even the increase in Central assistance far behind. The fiscal deficit that the Government has left unplugged is a whopping Rs. 1,321 crores. Even this estimate of the deficit has only been obtained by fiscal jugglery. For the deficit last year had been Rs. 1,788 crores. The State Government is silent on how it intends to reverse the rising trend in deficits of past years by such a large amount. One is therefore left with the uneasy suspicion that this is mere wishful thinking.

Not only does the government not have the foggiest idea of how it will ever restore balance to its budget, but it has already come under attack from the BJP in the state for the miniscule increase in taxes it has announced. It is, in any case, aware that even doubling the amount of new taxes will not make an appreciable difference to the deficit. It is no surprise that there is a sense of utter defeat in the Government. Why do something that will make no difference to the deficit but could cost you your seat in Government?

Himachal is not an exception: in state governments are in even worse straits. Today their expenditures so far exceed their revenues that it no longer matters whether they try to plug the gap or not. The reason is that for forty years they sowed the wind. Today they are reaping the whirlwind. Their impending bankruptcy has two basic causes: an indiscriminate expansion of their State bureaucracies and an equally profligate increase in subsidies, usually by not charging economical rates for the services and infrastructure they provide to the people.

Over the past 30 years while the central government has added barely one lakh jobs, the State and local governments have more than doubled the number of employees from 5 to 10.1 million. The Himachal Government employs over four lakh persons, or one out of every eight adults in the entire State. Its salary bill swallows 29 per cent of its expenditure budget, or 35 per cent of its revenues. Its pension bill accounts for half as much again. The balance of its revenues goes into paying interest on its State public debt. It has literally nothing left for development. But without making grandiose promises, and starting new development projects and schemes every year it cannot survive. So the promises are mad, the money is spent, and most projects are left incomplete.

Over the past 15 years it has borrowed through its state enterprises to fill the gap. But the interest it has to pay has become another millstone around its neck. This year half of the increase in expenditure of Rs.1,300 crores is accounted for by a rise in interest payments on such loans.

Today only shock therapy can save not just Himachal but all State governments from bankruptcy. They will have to fire a lot of civil servants and eliminate a large number of subsidies at one stroke. The Centre too needs to eliminate its huge subsidies on oil products, food and fertilizers, for that will enable it to increase its assistance to the states. But one has only to put this down on paper to realise that so long as India remains a democracy such shock therapy is utterly impossible. There is no light at the end of this tunnel.

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