Date:22/12/2004 URL: http://www.thehindubusinessline.com/2004/12/22/stories/2004122203090300.htm

Back World Bank's commandments on State reforms

Our Bureau

Chennai , Dec. 21

A WORLD Bank report has come out with 13 commandments to enable State Governments and the Centre to continue with fiscal reforms to achieve development goals.

The report is based on a study of 16 States, other than the North East, Union Territories and Delhi and Goa, and aims at stocktaking of fiscal reforms as a development issue. The suggestions are aimed at reining in expenditure, particularly the wage and pension Bill, improving revenues through more efficient tax systems and better sharing of resources between states and the Centre, and fiscal discipline.

Though there has been an improvement in the fiscal condition of some States after the crisis of the 1980s, the overall trend is that revenue deficit is not going down and debt levels continue to increase. Indian States are among the most indebted in the world. Of concern is the manifestation of a "reform fatigue" for instance, the reversal of reforms by many State Governments after the last elections. But, according to the report, there is no choice if the fiscal deterioration has to be arrested. While many State Governments have enacted fiscal responsibility legislation, most have not acted on it.

Different scenarios studied under the report indicate that it is possible for the States to eliminate State-level revenue deficit by 2007-08. It would be possible even in the case of the poorer States provided there are Central tax reforms and there is a joint effort by the states and Centre for fiscal discipline.

Presenting the report at a workshop organised by the Madras School of Economics and the World Bank, New Delhi office, here on Tuesday, Mr Stephen Howes, its Lead Economist, enumerated the suggestions:

On expenditure: Hiring restraint and real wage restraint can deliver significant fiscal gains; growth in the pension Bill can be contained by parametric and structural reforms; there are no sure paths to subsidy reduction but better management and commercial discipline in subsidy-receiving sectors are critical; quality of spending can and must be improved.

On loans and grants: States should be given more borrowing flexibility within firmly established global caps; reforms to the grant system should aim to make it progressive and performance-oriented; in a fiscally stressed system, an increase in Central tax/GDP ratio is critical to support the poorer states.

On institutional reforms: A central agency should be given the mandate to collate and improve State-level fiscal data; the Plan and non-Plan distinction should be abolished and all States must adopt fiscal responsibility legislation, which should be monitored by the Centre and external agencies.

Mr Howes pointed out that while State Governments may have different priorities on expenditure, areas of actual spending seemed to be similar. They needed to tackle the salary bills, which accounted for over 30 per cent of the expenditure. Pensions were growing at more than 20 per cent, annually. Particularly, at the lower levels, the staff was overpaid and the governments overstaffed.

The World Bank realises that subsidies are not going to go away, he said. It was also not possible to suggest a uniform solution, and some experimentation was needed. But fiscal discipline, if required, privatisation of services and improved targeting were needed.

On public sector enterprises, he said that while reforms were not going to be major revenue sources here, fiscal discipline would ensure that the loss makers are not continuously supported.

To improve the quality of expenditure, he suggested that the private sector be involved in delivery of services where possible, increasing transparency, improving public expenditure management and increasing capacity building at the management level. While the lower rungs of the governments were overstaffed, they were thinly staffed at the management level. Most States did not have a chief economic advisor, he said.

Revenue reforms should target increasing revenues by broadening tax base and simplifying the system. Introduction of value-added tax was key feature of this reform.