State finances

The first task of the new government in Maharashtra will be to put the state's finances in order. Simply put, the state's finances are a mess, with debt touching Rs 93,000 crore, or 25 per cent of the state domestic product.

Most of these loans are being used to fund the state's revenue expenditure, and revenue deficits have been mounting every year. The recent elections saw both the major alliances in a slanging match over who was responsible for the near-bankrupt treasury, but the truth is that both the BJP-Shiv Sena government of the 1990s and the incumbent Democratic Front administration have been responsible.

The problem is not new""and competitive populism is best illustrated by the complete unanimity of both alliances on the question of free power for farmers.

The new government will, therefore, have to find the money to keep its promises to the electorate apart from completing a number of infrastructure projects.

But perhaps the best gift that the government can make to the people of Maharashtra is to enact a fiscal responsibility bill. The reasons for passing such a legislation are well-known""they were keenly debated before the enactment of a similar legislation in Parliament.

Briefly put, it will save governments""and the opposition""from the moral hazard of pandering to vote banks at the expense of the public exchequer.

The positive effects are obvious: resources will be freed for doing the things that the state government needs to do, such as providing physical and social infrastructure, rather than appeasing powerful special interest groups such as the sugar and cotton lobbies.

Deterioration in state finances, of course, is not Maharashtra's problem alone. As a matter of fact, although the speed of the decline has been rapid in Maharashtra (it had a revenue surplus in 1994-95), it still manages to score better than many other states in terms of the fiscal deficit as a ratio of net state domestic product or in terms of the share of the revenue deficit in the gross fiscal deficit.

A growing interest burden, increasing salary and pension liabilities, the losses of state electricity boards and other state undertakings, and low user charges have all taken their toll on state finances.

The consequence has been a deterioration in the quality of government expenditure, evident from the declining share of spending on development from about 70 per cent of total expenditure during 1985-90 to 57 per cent in 2001-02.

Nevertheless, as the Reserve Bank's study on state finances points out, some encouraging trends have emerged in recent years. One of them is higher developmental spending by states, as shown from the revised estimates for 2002-03.

States are increasingly relying on raising their own resources, while the Medium Term Fiscal Reforms Programme (MTFRP) finalised by several states has emphasised the indexation of user charges in services such as transportation and irrigation.

Power sector reforms are also on the anvil, and the Centre's prodding on fiscal reform is providing the necessary impetus. Outstanding guarantees of state governments were lower at end-March 2002 than a year ago, thanks to statutory ceilings on guarantees instituted by several states.

In short, several states have already grasped the thorny issue of fiscal reform. It now remains for all the states to emulate best practices for every reform initiative.