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Manmohan calls for overhaul of state finances

August 06, 2003 12:44 IST

Painting a gloomy picture of the state finances and the Centre's fiscal management, Congress leader Manmohan Singh on Tuesday warned that a substantive improvement in the foreign exchange reserves alone stood between the current economic situation and a 1991-92-like meltdown of the economy.

Singh said given the post-9/11 global situation, he was not sure how long even foreign exchange reserves would continue their rate of accretion and warned of a serious economic crisis if decisive fiscal measures were not taken.

Speaking in the Rajya Sabha on the precarious condition of state finances, Singh said state finances were in dismal shape. And their financial compulsions required understanding from a holistic perspective.

From 9 per cent in 1985-86, state fiscal deficit had reached 9.3 per cent in the 8th Plan. At present, the deficit stood at 10.4 per cent.

The average revenue deficit from 1985-86 to 1998-99 was 2.6 per cent but the combined revenue deficit for the last year was 6.9 per cent. Likewise, the debts of the Centre and states, which together accounted for 58 per cent of the GDP in 1986, had gone up to a "horrendous" figure of 95 per cent of the GDP in 2003, Singh said.

The situation was such that despite the prevailing formula that 30 per cent of the GDP would be spent on public expenditure in the states and the Centre in a 50:50 ratio, during the Eighth Five Year Plan, only 2 per of the GDP was spent on health and education.

Singh pointed out that this was due to lack of money. In the Centre's tax reforms, rates had been reduced but the tax base had not been widened. The states' own taxes like sales tax, etc, had declined in buoyancy. The states had also been dealt a heavy blow by the Fifth Pay Commission.

"It is time to review wages and salaries in the central government. The new mechanism must be more consultative, more gradual," Singh said.

Apart from enlarging the incentive-linked central assistance to states, Singh said the scope of 12th Finance Commission should be enlarged to take an integrated view of the unsustainable debt situation of the states.

Singh mooted the idea of putting a cap on borrowing by the states, but suggested this be preceded by steps by the Centre to restore the fiscal health of states.

Singh said states too had a role to play in improving their finances, particularly in improving the health of electricity boards and transport corporations.

He warned against the indiscriminate use of special purpose vehicles, which had led to a huge increase in contingent liabilities.

Singh said the Centre's macroeconomic finances were healthy enough to bear the pressure of state deficits, particularly in view of food stocks and low interest rates. He urged the Centre to treat states 'more sympathetically."


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