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| In 2003-2004, debt servicing accounted for 46 per cent of the non-developmental expenditure of all states. With the debt doubling, this situation will become infinitely worse. |
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| Add to this the mounting pension bill and 65 to 75 per cent of expenditure will be to square off past liabilities. |
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| It is easy to castigate the states for poor fiscal management, but the fact is that the Planning Commission and the Union ministry of finance determine state borrowings. |
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| The Planning Commission approves large plan outlays without credible resources in sight and the gap at the end of the year is met through borrowings. |
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| The finance ministry on its part estimates tax revenues and, on that basis, the states factor in their share of taxes in their budgets. But the finance ministry usually falls short in its tax collection. |
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| In the last three years, tax collection has fallen short by more than Rs 65,000 crore. The brunt of this shortfall is borne by the states. Result: more borrowing, approved by the Centre to paper over its own failings. |
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| Where the states have failed is in getting adequate returns from their investments. The most glaring example is power. This is one area that needs reform. |
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| But, it is also to be recognised that the bulk of state government spending is on social services, which cannot yield direct financial returns. The worrying part is that, even if states keep fiscal deficits in check in future, the issue will not be resolved because of the existing overhang of debt, which will continue to strain state finances. |
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| Recognising this, the central government has initiated debt restructuring by allowing state governments to go in for debt swaps of Rs 25,000 crore every year for the next five years. This is not enough. |
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| There is need for debt write-offs, which are not necessarily bad. The fiscal constraints put limits on the debt relief that can be organised, so it is important to work out a package that minimises the cost and maximises the impact. |
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| Corrective measures must provide an incentive for the prudent use of borrowed funds. Incentives should be for better fiscal management, and priority must be for states that have contracted debt to fund social services like health and education. |
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| In other words, states that have spent more on these services, and which are not expected to get financial returns, should get a higher debt write-off compared to those who have used it to finance economic services and failed to make recoveries from them. |
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