Vote Vajpayee

RATIONAL EXPECTATIONS

While BJP leaders are going to town with their India Shining campaign to woo voters, it seems to me they aren't stressing on another topic, vital for wooing the allies they so desperately need.

And that's the simple fact, that being an NDA ally makes good economic sense. 'To the victor belongs the spoils' remains as true of the marauding Moghal armies as it does of allies of the ruling party at the Centre today.

Indeed, the Karnataka government has just learnt the hard way what it means to not be an ally of the party at the Centre, just as the Andhra Pradesh one has realised the fruits of being on the right side of power.

While the World Bank's India chief Michael Carter said he found Karnataka's economic reforms impressive when he came to Bangalore to hold discussions with chief minister S.M. Krishna in November and announced that a $ 200 million structural adjustment loan would be cleared soon (The Hindu, November 10), the central government got the Bank to put off the loan on the grounds the state had not met its commitments under the medium-term fiscal reform facility (MTFRF)!

A fact, by the way, that is strongly contested by the Karnataka government which even put out a press release saying it had met the MTFRF conditions.

What's interesting, of course, is that Andhra should be allowed to get a $ 300 million from the Bank ($ 220 million) and the UK's Department for International Development ($ 80million) when the state has not met its MTFRF commitments either.

While, as is the case with Karnataka, the state also claims to have met its revenue deficit reduction target, the fact is the central government has not released the obligatory incentive payments to Andhra "" in other words, the Centre does not believe Andhra's met its obligations either.

In any case, anyone familiar with the way states report their fiscal numbers knows that one of the reasons why the Karnataka numbers look worse is that the state started including the losses of its electricity board in the Budget from 2002-03 onwards, while few other states do this.

Of course, it's not just the NDA that is guilty of favouritism. Work done by Stuti Khemani of the World Bank shows that, for the period 1972-95, states that were ruled by allied parties typically received transfers from the Centre of between 4 to 18 per cent more than that for the average of 15 major states.

In fact, for these states, the plan transfers tended to be higher by between 10 and 30 per cent, deficits also tended to be higher by around 10 per cent, and these were generally financed entirely by additional loans from the central government.

Interestingly, the Karnataka government's press release alleges the Centre has allowed certain states like Andhra and Tamil Nadu to make additional borrowings (under the law, the central government effectively controls how much states can borrow, and this also becomes a tool of favouritism).

Similar analysis by M Govinda Rao who heads the National Institute of Public Finance and Policy and Nirvikar Singh (economics professor at the University of California at Santa Cruz) shows grants for state plans (this comprises around 20 per cent of all transfers to states, including statutory sharing of tax revenues) are significantly determined by whether the same party is in power at the Centre and at the state level "" in fact, in their sample, the grants were around 30 per cent higher for ally states.

In fact, according to Rao, in the case of grants for state plans, the discretionary element has gone up from 10 per cent in 1991 to around 50 per cent today.

Each Budget, of course, makes it obvious which states are favoured "" the latest budget announced that states like Andhra and Tamil Nadu will see one medical college each being upgraded to an AIIMS, and six states like Rajasthan and Madhya Pradesh will get an AIIMS-level hospital. But what's less visible is the help that can be got in terms of investments by government-owned PSUs.

The reason why Andhra figures as one of the country's top investment destinations, despite all the high profile investments of the recent past going to states like Tamil Nadu, is that 60 per cent of Andhra's investments are by the public sector, and a third of this is made by central government PSUs. There are few other states where central PSUs invest as much.

Of course, while it pays to be an ally of the ruling party at the Centre, an interesting aside is that the state shouldn't be fully aligned to the ruling party either. Khemani finds, for instance, that among the allied states, those that have less Lok Sabha members from the ruling party, tend to get more funds!

The reason is simple: if the NDA, for instance, already has most of the seats from Tamil Nadu, there is little incentive to give more funds to the state. If, however, it has just a fourth of the seats, it makes sense to give more funds to the state, in order to win more seats.

Central to the argument so far, of course, is the presumption that the NDA is going to win the elections in the manner most political pundits are predicting.

Well, if it helps, one of Khemani's papers on voting patterns shows that while voters tend to judge incumbents on their entire term in the case of local elections, when it comes to national elections, they look at just growth in national income and inflation for the last one year "" and that's the year of India Shining!

suniljain@business-standard.com