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Whatever
spin different commentators may put on the electoral
verdict, one aspect is crystal clear. The electorate
has rejected resoundingly the claim that a general ''feel-good''
has followed the economic ''reforms'' which have delivered
to the rich by reigning in taxes and government discretion.
Every
Central government that ''reformed'' in this manner since
1991 has lost the subsequent election. And, in keeping
with this trend, the party political message from the
present verdict is also rather fractured. While the
NDA is the big loser overall in these elections, the
Congress too has not been spared. Its Vidhan Sabha defeats
in Chattisgarh, Madhya Pradesh and Rajasthan have been
repeated and not only has it suffered further loss in
Assam, Karnataka, Kerala and Punjab, its Maharashtra
performance though better than 1999 still augurs poorly
for Vidhan Sabha prospects.
Nonetheless, the just concluded elections have demonstrated
more clearly than in the past that claims of development,
however hyped, are meaningless without results at the
grass roots. And, in particular, that if ''reforms'' and
less government mean poorer infrastructure, collapsing
systems of education, health and food security and withdrawal
of support to agriculture, voters will have none of
it. As the new dispensation takes office on its promise
of delivering to ''common people'', it is necessary to
bear in mind that none of these concerns can be delivered
upon unless finances of State governments are sound.
Most election manifestos have missed this.
This has the implication that efforts to arrive at a
Common Minimum Programme (CMP) may fail on the essential
concerns of voters, if the economic content of this
remains limited to broad statements on specific areas
of Central government competence. With the nation’s
population now split roughly evenly among States where
Congress, its allies (both pre-and post-poll) and the
NDA rule, Centre-State financial relations are probably
the most important economic issue that needs to be addressed
– differently from the atrocious and partisan discretion
shown by the NDA on this matter.
Many of the issues involved fall properly in the domain
of the Twelfth Finance Commission (TFC), which should
not be interfered with. But this Commission is bound
not only by its terms of reference but also by current
fiscal practices which it must assume while making its
awards. The Central government must make clear whether
it contemplates any change in the TFC’s terms of reference
or on parameters that might affect its assumptions as
quickly as possible.
As to terms of reference, the potentially controversial
area is grants linked to reward of ''performance''. Since
this is an area that gives the Centre discretion on
what constitutes ''performance'', the new government should
indicate where it stands and the matter discussed with
at least those who are party to the CMP. But the more
important area is to indicate immediately, the new government’s
position on the two issues which have virtually bankrupted
all State governments: the impact of Pay Commission
awards and the overhang of high cost debt.
The area on which immediate movement is possible is
debt owed by the States to the Centre. The total public
debt of States is currently about 30 percent of GDP,
and interest payments have doubled as percent of revenue
since 1991 to about 25 percent. Roughly 40 percent of
this total debt is owed to the Centre and nearly another
20 percent is owed to the National Small Savings Fund
(NSSF). Restructuring these two debt components can
substantially improve overall State finances.
On this, a recent concept note from the Planning Commission
has suggested that all State debt to the Centre (but
not to the NSSF) be written off and that there be no
further loans from Centre to States. According to this,
all future Centre to State transfers would take only
the form of grants and all borrowings would only be
from the market, but subject to Reserve Bank discipline
under Article 293 of the Constitution.
Although this suggestion of complete write-off may attract
criticism, the idea is bold. It can help to clear the
logjam that currently results in the much higher than
market interest rates paid by States, with the Centre
receiving more from these interest payments (including
to the NSSF) than it collects from income tax. A decision
on this is necessary and it must also extend to Small
Savings.
If
not a complete debt write-off, at least the State debts
should be quickly restructured to ensure that interest
liabilities are at no more than the market rates at
which the Centre itself borrows. For State finances
to be viable, the long-run requirement is that the average
rate of interest must be substantially less than the
medium-run rate of growth of nominal GDP. This at least
must be assured if States can begin delivering on what
voters clearly want.
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