NewsApp (Free)

Read news as it happens
Download NewsApp

Available on  

Rediff News  All News  » Business » Fiscal time-bombs are ticking away in every state

Fiscal time-bombs are ticking away in every state

September 08, 2006 16:14 IST
Let me borrow to invest!' was Kerala Finance Minister Thomas Isaac's plea at a recent seminar in Delhi. Dr Isaac is a trained economist, and he understands that there can be no development without capital.

But I wonder if his colleagues -- in fact, Kerala at large -- have grasped the point that land, labour, and capital are blunted tools in the absence of entrepreneurship.

I heard Kerala's finance minister make a convincing case for our mutual home state at a seminar in Delhi. Kerala, Dr Isaac pointed out, beats every other major state when rated on the Human Development Index; we lead the country in everything from female literacy to life expectancy at birth (male or female) to the number of hospital beds on a per capita basis.

That is the result of a sustained thrust going back over a century, by governments and non-governmental organisations, by radicals and conservatives alike. At the end of it all, however, Kerala has little to show, in purely economic terms, for all its social sector spending.

How bad is the crisis? Consider this admission from the Kerala finance minister: the state's overdraft is over Rs 1,000 crore when the permissible limit was Rs 360 crore. Dr Isaac also says the revenue deficit is growing; this fiscal year it will be Rs 1,853 crore more than it was in the previous 12-month period.

There is a general consensus, cutting across party lines, that the state cannot cut spending on education, health, and welfare activities. Fair enough, but if you don't control expenditure where is the money for developmental activity? The answer, says Dr Isaac, lies in borrowing.

This is where there is a fundamental philosophical divergence. Dr Isaac was remarkably silent on a basic issue. Who is to borrow money? Will it be private individuals, will it be industry (whether privately-owned or in the public sector), or will it be the government? The potential lenders will want to study both the previous record of the borrower as well where and how the new loans shall be invested. I am not sure if Kerala can give clear answers to either question.

Please understand that I am not singling out Kerala, these are questions confronting every state. Take a look at the findings of the last Finance Commission, and you will see what I mean.

Kerala's debt-to-state domestic product ratio is better than in Orissa, Bihar, Rajasthan, Punjab, and West Bengal. However, Kerala's closest neighbours -- Tamil Nadu, Karnataka, Andhra Pradesh, Maharashtra -- show better statistics. A potential lender might classify Kerala's debt management as just average.

Indebted states need not expect too much assistance from Delhi. The Union government has informed Kerala that it will not provide debt waivers and interest concessions, collectively worth Rs 220 crore. That is because the state has failed to keep its fiscal deficit under check.

(Oddly, Kerala also pays a price for its social sector successes. The Twelfth Finance Commission allotted a weight of 40 per cent to population. Since Kerala has a better record in population control, it gets less money; specifically, Rs 6,088 crore less than it would have got under the Tenth Finance Commission. And while the Twelfth Finance Commission offers Rs 16,059 crore to upgrade health and education services elsewhere, there is no such provision for Kerala. There is something insane in penalising Kerala for its above-average standards in primary education and health!)

Whatever the causes, Kerala's fiscal deficit stands at 6.4 per cent, where 4 per cent is the upper limit specified in the Fiscal Responsibility & Budget Management Act. As per the FRBM Act, the fiscal deficit must be cut by 0.3 per cent and the revenue deficit by 0.5 per cent of GDP annually. The aim is to wipe out the revenue deficit by 2009, and bring the fiscal deficit to 3 per cent of the GDP. Every state enacted mandatory laws in line with the FRBM Act.

Dr Isaac pointed out the problem. The Government of India says Kerala's borrowing ceiling is Rs 4,672 crore. That is actually Rs 2,574 crore less than the sum fixed by the Planning Commission.

As I said, the dilemma is not Kerala's alone. This has set off a fascinating debate between the Planning Commission and the Union finance ministry. Planning Commission Deputy Chairman Montek Singh Ahluwalia insists the focus should be on providing additional resources, not on belt-tightening. Dr Ahluwalia puts it bluntly: 'We really do not care for FRBM Act targets so long as we get the money for the planned programmes.'

But it was this prime minister and this finance minister who piloted the FRBM Act through Parliament. And P Chidambaram insists that adhering to FRBM targets is critical for macroeconomic, financial, external sector, and budgetary sustainability. What he means is that nobody will lend money unless the borrower shows a willingness to manage debt responsibly.

As noted, Kerala already leads the pack in fields such as education and health. But what of other states, notably in northern India, which must somehow pay not just for social sector programmes but for other developmental activity. Where will they find the money to pay for both?

In principle, I have nothing against a state government borrowing to 'invest in developmental activity'. But have all the borrowers worked out the costs? Can they absorb the interest payments as well as the administrative costs of the 'developmental activity' without sinking further into debt?

The lenders of today are not concerned about the Human Development Index, they simply want assured returns on their loans. Dr Isaac made his case about the need to borrow. But he was silent on what kind of investment would be made with future borrowings. If Kerala, with all its history of social sector spending, now faces a debt trap, what is the fate of other states, those that have invested neither in education and health, nor in development?

If governments have no money left for pure economic development we must look elsewhere. But will the private sector step in given the absence of political will in tackling, say, administrative and labour reforms? If not, will we sink even deeper?

India can shrug off terrorist explosions. But the fiscal time-bombs ticking away in every state capital carry greater potential for panic.

T V R Shenoy