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NDC to bail out cash-strapped states; be flexible while bearing pay hike burden, FM tells states

The National Development Council sub-committee on fiscal issues today agreed to provide a package to states facing serious financial problems. Also on offer is advance tax devolution to address immediate financial needs and medium-term sustainability, specially to eliminate revenue deficits.

Finance Secretary Vijay Kelkar said in New Delhi today that the NDC had decided cutting by half percentage interest on small saving loans to states from 14 per cent. This is the second reduction in interest rates in the past few months, with the interest rates being 14.5 per cent before January 1999.

He said an official committee would be constituted to sit with the states and work out state-wise reform package and a package of immediate assistance in eight weeks.

Pending this, some immediate relief by way of advance tax devolution will be provided to the states. The exercise will be completed in eight weeks in April and May.

The official committee will be set up under the chairmanship of secretary (planning) and will comprise secretary (expenditure), finance secretaries from the states concerned and representatives of the Planning Commission. The panel will work out separate reform packages for states. Another package of immediate assistance will also be worked out by the committee.

Kelkar said a special package will be worked out for special category states. An extension of overdraft by specified number of days will be examined in consultation with the Reserve Bank of India.

The committee recognised the financial stress through which the states were passing through particularly in view of the implementation of recommendations of the Fifth Pay Commission, he said.

Kelkar said there was a need for a joint effort on the part of the Centre and the states to evolve a sustainable solution. While there were several options that had been demanded by the states, it was important that any package of assistance that would be worked out, has to be linked to time-bound medium-term fiscal reform programme.

The Planning Commission, the ministry of finance and the state concerned will jointly work out such a programme.

The options suggested by the states include advance tax devolution during 1999-2000, a special ways and means accommodation to be given to the states, additional market borrowings and a limited rescheduling.

Kelkar said the nature and scope of packages that would be worked out will depend on the specific ways and means and structural problems faced by each state.

The meeting was attended by Rajastan Chief Minister Ashok Ggehlot and the finance ministers of West Bengal, Assam, Gujarat, Uttar Pradesh, Jammu and Kashmir and Tamil Nadu.

During the full-fledged meeting of the NDC meeting on February 19, the government asked the RBI to advance the implementation of the new and increased ways and means limits by a month to March 1, 1999 to provide some breathing time to the states.

The convening of the meeting was also delayed though the prime minister had assured that the meeting of the sub-committee would be convened within a fortnight.

Earlier Finance Minister Yashwant Sinha in his address to the sub-committee said that the RBI had already communicated that the new ways and means limits had become operative. The increase available varied from 28 to 84 per cent of the existing limits of various states.

Sinha said it was time for decisive action and not rhetoric, when the financial situation of the states needed to be tackled on a war footing. The prime minister's address at the last NDC meeting, the Ninth Plan document and the Budget had underlined the issue, he said.

Some of these points were the need to mobilise additional resources through levying reasonable electricity tariffs and irrigation charges, removing distortions in resource allocation on account of untargeted and unintended implicit subsidies, augmenting tax on non-tax revenues, arresting non-plan revenue expenditure, revising user charge on public services, improving the functions of public enterprises, especially the state electricity boards and state road transport corporations.

He said his Budget strategy involved expenditure management by downsizing government and constituting an Expenditure Reforms Commission, besides the concept of zero-based budgeting and establishment of guaranteed Redemption Fund would go a long way in fiscal correction.

Sinha said the impact of pay hikes is not uniform in all the states since there is considerable difference in the composition and scales of pay revisions adopted by different states. Also, these revisions came into effect on different dates in various states.

This difference is a positive trend, because there is no compulsion for all states to equally increase the salaries of their employees, he said. He asked the states to be guided by their respective ability to finance additional liability such as this, and the level of local wages which differ a great deal from state to state.

If a state has finally decided to revise the pay scales of its employees, the state should re-prioritise its expenditure on other items, as has been done by the Central government.

On the ability to mobilise resources and thus to finance contingent liabilities, Sinha said track record of states has not been uniform. There are considerable differences in the levels of taxation. Some states have done distinctly better than other states.

It is seen that because of the tax efforts of these states, their expenditure performance has also been better. On the other hand, there are states with poorer track record, showing co-existence of lower tax efforts and high establishment costs. Therefore, there is a need to improve tax efforts and reduce revenue expenditure, with a view to increasing investment for development, Sinha said.

Sinha said the current ways and means imbalance faced by the states is not of a recent origin. While it was true that salary hikes may have further worsened the situation in most cases, the erosion in the health of the fiscal system began some time ago.

''If we look at the past trends, prevailing even prior to the pay hikes effected by the Centre, there has been a cause for concern. Revenue deficits of states have risen constantly since 1987-88, and reached in 1998-99 a whopping proportion of 44 per cent of revenue expenditure,'' Sinha said.

Borrowings and interest payment liabilities have grown unabated, creating a serious problem for the sustainability of the fiscal system. The current fiscal stress is only a manifestation of the structural imbalance which could have been accentuated by recent pay hikes, Sinha said.

UNI

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