There was a time Bihar used to cite itself as being a victim of a low spending-low development cycle. No longer. The state is now not only spending and raising money, but is also under pressure to balance its books, having voluntarily legislated the Fiscal Responsibility and Budget Management (FRBM) Act in February 2006.

Almost exactly midway through the new regime, Bihar's finances might not be in the pink of health but they look better than they have ever been. Sales tax collections were up 23 per cent in 18 months, Chief Minister Nitish Kumar says. The 2007-08 Budget was Rs 50 crore surplus. This was largely a result of a dramatic tax rationalisation undertaken by his government to ensure compliance.

But with a large development bill to pay, making ends meet is not easy, state government officials say. The state this year has an accumulated debt of Rs 42,500 crore, which is 70 per cent of the Gross State Domestic Product. It will spend Rs 1,630 crore in repaying the debt and Rs 4,000 crore in interest payment this year. Add to this pensions (Rs 3,123 crore) and salaries (Rs 6,369 crore) and Bihar will already be spending one-and-a-half times the Plan size.

So where will the money come from? The 11th Finance Commission had awarded Bihar Rs 7,000 to Rs 8,000 crore less than was due to it -- because revenue collection was lackadaisical and fell grossly short of target. But the 12th Finance Commission has corrected the shortfall and Bihar will get Rs 7,500 crore more.

But options are limited. Kumar's first priority is to retire high-value loans and instead secure central funds that come as grants. This will at once reduce the state's debt and debt servicing obligations. Negotiations are on with the World Bank, the DFID and the ADB to secure funding for development.

However, the pain of paying pensions and salaries remains as before. As much as 46 per cent of the total state government resources are spent on salaries and pensions. Instead of going down, this is going up and disturbingly, it is the Grade C and D employees who are being appointed in higher numbers than before. This means that more money is being spent on the appointment of non-productive employees than in creating the technically qualified corpus of public servants that Bihar needs. Grade C posts account for three-fourths of all sanctioned posts in government.

Salaries and allowances paid in 2007-08 are likely to be in excess of Rs 7,800 crore. The government is awaiting with trepidation the next Pay Commission report. That is likely to wipe out at one stroke whatever modest gains the state has been able to make in balancing its books.