Thus far similar liberalisation efforts have not proved to be a problem since low oil prices and large inflows of remittances from India workers abroad (amounting to $10-12 billion) have helped shore up the balance of payments and translate capital inflows into accumulated reserves. But with oil prices hardening and domestic foreign exchange demands increasing substantially in the wake of the new round of liberalisation, it is likely that autonomous inflows of foreign exchange could prove inadequate to meet foreign exchange demands. India's external vulnerability, reduced because of a set of "unanticipated" benefits, is now once again on the rise, increasing the possibility of a financial crisis of the Southeast Asian kind.
 
Thus, the qualitative change in the economic environment arises not because of new directions in reform, but because the rapid acceleration of the same old reform process is qualitatively changing the external environment facing the county. What is at issue s not a new "generation" of reforms, but the blind pursuit of a path that allows profligate use of foreign exchange with little concern for earning the wherewithal needed to meet the costs of pursuing that path.
 
Does this mean that there is no generational shift in the reform process that is likely? It does not. One way in which such a shift is likely to occur is through a movement of the reform process from the Centre to the States. In India's quasi-federal system, there a host of economic decisions that are made or implemented at the State level. The process of economic "reform" or liberalisation affects the States of the Indian union in manifold ways. First, since reform has as its principal focus the liberalisation of trade, exposure to competition from abroad can adversely affect economic activities that are of importance to or even the mainstay of individual states. For example, the liberalisation of the edible oil trade and the trade in primary commodities has, in the recent period when international commodity prices have been on the decline, had damaging consequences on the incomes and livelihoods of sections in Kerala engaged in the production of a range of primary products.
 
Second, the process of fiscal adjustment at the Centre has involved reductions in per unit food subsidies and substantial cuts or stagnation in social and capital expenditures, resulting in inadequate social sector services and virtually no progress on the poverty alleviation front. Most often, it is the government at the State level which has had to deal with the likely social consequences of these developments, reducing their manoeuvrability.
 
Finally, with the recent reductions in interest rates on small savings instruments such as the PPF, it is likely that small savings collections, much of which goes to the States, would fall. In addition, the direct tax and excise duty concessions which have accompanied reform, have eroded the States' share in central taxes. This together with the refusal, till recently, of the centre to implement the new tax devolution principle (wherein 29 per cent of all tax revenues are transferred to the Sates) recommended by the Tenth Finance Commission, and accepted by the National Development Council meeting in July 1997, has involved a loss of revenues estimated at over Rs.4000 crore a year for the States.
 
In partial response to this situation, and under pressure from allies in the National Democratic Alliance, the government has decided to implement the revised revenue sharing formula recommended by the Finance Commission and approved by the NDC. But by choosing to apply the 29 per cent-share principle to net rather than gross tax receipts, the Centre has retained almost 50 per cent of the States dues in its hands. This implies that despite the recent announcement the fiscal problems faced by the States would persist.
 
There is enough evidence world-wide that a fiscal crunch, attributed to fiscal mismanagement, provides the basis for pressure to launch on economic reform. In India, without revealing the actual processes by which the fiscal crunch at the State level has been generated and without examining its relation to reform at the central level, the fiscal problems of the states have been attributed to fiscal mismanagement. In particular, the losses sustained by public sector corporations, the state electricity boards and the inadequate recovery of costs by departments providing irrigation, health and primary education, have provided the bases for explaining the fiscal crunch in full.
 
This has led up to a wholly new way in which the wave of reform has begun to affect the States. In some cases, individual States have turned to organisations like the World Bank for sectoral lending and have in return been required to adopt a more comprehensive reform programme, involving above all else an across-the-board increase in user charges for public services, in order to restore fiscal health and build the capacity to meet the future repayment commitments associated with large scale sectoral lending. What therefore starts as a sectoral borrowing programme ends up being a larger State level structural adjustment programme involving a major restructuring of State finances.
 
The response of individual States to this situation has varied. Some have gone ahead with the reform programme, as is true of Andhra Pradesh. Others have gone a part of the way or, like West Bengal, have resisted intervention by the Bretton Woods institutions. However, the protagonists of reform insist that an important component of "second generation reform" has to be Bretton Woods-style reform at the State level.
 
The implications of this for the cost of living in individual States, after they implement tariff hikes for public services, and for social expenditures, are obviously adverse. It is for this reason that many States are wary of treading the reform path. But if the fiscal squeeze on the States persists, many of them may be forced to accept far-reaching "reforms". In that event, India would have definitely entered a whole new phase in the reform process. In all probability, it is the effort to force such an outcome on the States that explains the hype surrounding what are being ambiguously termed "second generation reforms".