A Powerful Issue

What exactly are the states committing themselves to? The key conditionalities in the first MoU to be signed, with Punjab, suggests that it will take a political Braveheart to implement them.

The Punjab government had committed itself to a range of expenditure cuts, phased withdrawal of all tax exemptions, disinvestment of equity in state undertakings, recast of the tax regime and additional resource mobilisation through increases in tax rates and user charges for power and water. All of this would come up for review in June, by a special task force being set up by the expenditure department of the finance ministry.

On the expenditure side, Punjab has committed itself to cut non-plan revenue spending by five per cent. This will entail limiting petrol consumption by government vehicles, a ban on buying new vehicles, capping telephone bills, the withdrawal of some perquisites, suspension of Leave Travel Concession for one year and a ban on foreign travel.

The subsidy bill is to be pruned by 15 per cent every year for the next three years. In addition, the state government has committed itself to an increase in user charges. In the case of social services, like hospitals, the state government has decided to double the recovery from Rs 2 to Rs 5 for every Rs 100 spent. Similarly, the recovery will be hiked from Rs 11.50 to Rs 25 on economic services like agriculture and irrigation.

The Punjab government is also committed to withdrawing the sales tax exemptions doled out to industrial units. At present, the share of the state's sales tax in its total revenue is at 40 per cent, while the national average is 60 per cent. This is to be accompanied by an overhaul of the tax regime, entailing a reduction in the 17 rates to probably three or four.

The state will also mobilise additional resources of the order of Rs 565 crore by upping road tax and vehicle registration charges and sale of surplus government land.

The state government has also promised to correct the skewed tariff regime for power. At present, while farmers are given power free of charge, industry pays the highest rates in the country. Clearly, the free power regime accorded to the Punjab farmer is coming to an end.

In the case of water charges, the state government has agreed to increase in a phased manner the user charges to recover the economic costs. At the very least, the state government has promised to recover costs of operation and maintenance.