August 10, 2020
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Mind Your Own Wallet

The case for fiscal autonomy is strong. But are the states demanding it responsible enough?

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Mind Your Own Wallet

Farooq Abdullah’s demand for autonomy for Kashmir has opened a Pandora’s box alright. Except that the consensus among experts is that three of the four states-J&K, Assam, Punjab and Tamil Nadu-which have demanded autonomy won’t know what to do with it if they get it.

Indeed, in liberalised India, autonomy, especially fiscal autonomy, is an idea whose time has come. States today are competing for foreign projects, multilateral aid, infrastructure investments and sprucing up their record-books to present a better face to the interested. And fiscal autonomy could greatly help. Trouble is, fiscal autonomy goes hand in hand with fiscal responsibility, which is absent from the balance-sheets of the first three states.

J&K and Assam, for instance, are among the 10 special category states in India which account for 5 per cent of the population, yet hog 30 per cent of Central assistance. In ‘99-2000, J&K got Rs 2,632 crore, Rs 250 crore more than a much bigger and worthier state like Bihar; Assam got Rs 1,616 crore, the same as Karnataka. Says N.J. Kurian, member, financial resources, Planning Commission: "None of these states would be fiscally viable on their own because their revenues, including the devolution formula money, are not enough to cover even day-to-day expenditure."

Reforms have pushed the case for autonomy.

He’s right. Staff salaries and poor revenue efforts are the biggest problems facing India’s states, most of which are poorly managed and, therefore, over-dependent on Central funds. What, for instance, do these states plan to do with their debt once they get autonomy? Get the Centre to write it off? How else can Assam tackle its Rs 7,850 crore (as on April 1) of accumulated debt, 64 per cent of which is owed to the Centre? As for J&K, whose autonomy demand includes an end to Central funding, it’s a delicious irony that currently, virtually the entire state plan is financed by the Centre as well as a substantial portion of its non-plan expenditure.

Historically, Assam was the first state to toy with the idea of autonomy. That was even before Independence. One of the chief complaints is still to be solved. A senior government official feels that the states’ grievance on mineral and petroleum royalty is genuine. "States like Assam, Bihar and MP suffer partly because the Centre doesn’t pay these enough royalty on minerals." But what has Assam done with its strongest competitive advantage? Its fertile land, abundant monsoons and Brahmaputra’s largesse have not been utilised enough to tap its full agriculture potential. In this backdrop, complete autonomy can be a distant dream. In fiscal 2000-01, of the Rs 9,358 crore flowing into the state’s consolidated fund, Rs 5,243 crore-or 56 per cent-will come from the Centre. This includes the share of devolved taxes.

J&K’s economic record is probably bleaker than its political one. With a population of 8-9 million, the strife-torn state’s own tax revenue plus Central devolution together isn’t enough to pay wages. Staff salaries are anyway paid to double the number of employees who work, for not only is the salary paid to the Hindu refugee who has left J&K, but also to his/her replacement. Says the official: "When former PM Deve Gowda went to Srinagar, they extracted a promise from him that the Central plan would be maintained at Rs 1,700 crore, irrespective of the non-plan component." Last year, J&K had a balance on current account (BCR) gap (current earning minus current spending) of Rs 2,000 crore, even as it managed to spend only half its plan outlay. Development work is almost stalled, while in the power sector, with several high-profile projects hanging fire, free supplies even to government staff have helped multiply losses in the sector to Rs 600 crore.

Punjab, on the other hand, has seen its fortunes reversed dramatically over the recent past. The granary of India now owes a princely sum of Rs 30,000 crore as public debt. As of 1997-98, each Punjabi carried a debt of 50 paise out of every rupee of his income. This, even as state government staff are the highest paid in India.

It wouldn’t be fair to put the blame for all this at the Centre’s doors. Since the return of electoral democracy in Punjab, the government has followed fiscal populism-the state that had the second highest per capita income in ‘97-98 certainly didn’t need free water and power for its inhabitants. Including interest payable on state government loans, the 75 psus total up a loss of Rs 1,100 crore, the same as the annual power subsidy for the agriculture sector. This profligacy, along with the pay commission awards which hit Punjab the hardest as it was already paying very well, pushed the accumulated debt by one-third in the last five years (the present P.S. Badal government took over in early 1996 and made power and water virtually free to farmers) to Rs 30,000 crore.

Both Punjab and Assam have recently signed MoUs with the Centre, promising to make sincere revenue-raising efforts, slash staff, own consumption expenses and make urgent reforms in lieu of short-term bailout money. But whether that would be a good beginning to wipe out the long history of bad governance by Badal and Mahanta remains to be seen.

Ten special category states get 30 per cent of total central assistance.

It’s not as if Tamil Nadu’s economic record constitutes a case for full autonomy, but through the Rajamannar Commission, the state was the first to formally voice the demand in 1971. That confidence still stays-finance managers of the state feel not only is Tamil Nadu better managed than most other states but also the Centre. They also concede that autonomy now has a better chance to succeed now that the Centre-controlled licence-permit raj is over.

Says J.V.M. Sarma, professor, NIPFP: "TN’s problem is that growth has come to a standstill. All irrigation facilities have been utilised and industrialisation is stagnant. Sales tax collection has reached saturation point and there’s no money for social projects. The Centre can do without social work, but can the states?" TN officials reason that revenue growth is seven per cent for the last two years and interest payments take only 12 per cent of the inflow-the average for other states is 22 per cent. Gross state domestic product (GSDP) growth rate is over 6 per cent for the 1990s, with the CMIE relative infrastructure development index at 144 (national average is 80). Though the state ranked 8th (in 1997-98) in per capita income, industry’s contribution to GSDP is the highest after Maharashtra. Ample evidence that it "is not dependent on the grant from the Centre but can fund its own development", says a senior official.

Abdullah may have his own selfish reasons for seeking full autonomy for a state which has little economic strength, but that doesn’t dent the case for more fiscal independence to states. If more states do not want it, it’s because they don’t want to lose their powers and manoeuvrability at the Central level. For one, the existing tightly-knit federal structure, which doesn’t allow states to borrow independently, has not stopped states from running up huge debts, nor helped in reducing unequal progress among regions, rather aggravated it. Nor has the old formula for Central devolution (according to size and population) worked to reduce the miseries of bigger and poorer states. If at all, the gap-filling approach in plans has discouraged states from practising financial discipline.

The good thing is that the Centre is already practising much more federalism than ever before. For the first time, the 11th Finance Commission has the mandate to examine the state of finances of the Union and states and suggest ways for improvement, not just identify quantums of central aid. And the states are getting World Bank or ADB reform aid directly. But the poser remains: why doesn’t the autonomy question ever bother Maharashtra or Gujarat, India’s most well-developed states?


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