Parties share blame for Maharashtra's fisc

EMPTY COFFERS-II/ Power, Water, Cotton, Sugar policies hurting state

During the five years of the Congress-NCP rule (and taking the Budget estimates for 2004-05) in Maharashtra, borrowings more than doubled.

But Chief Minister Sushilkumar Shinde points out that "much of the debt raised by my government was to repay the high-cost debt taken by the previous regime".

Outstanding debt, which was 12.7 per cent of the gross state domestic product (GSDP) in 1995-96, and 18 per cent of GSDP by the end of the BJP-Shiv Sena rule, is now 25 per cent of GSDP. Interest payments also rose sharply.

Note also there are plenty of government loans taken off balance sheet. The Shiv Sena-BJP government floated several special purpose vehicles, such as the Krishna Valley and Vidharba Irrigation projects, which have been downgraded to default grade by Crisil.

What has gone wrong? Ajit Ranade, chief economist of the Aditya Birla group, says the reasons for the mess can be summed up in four words "" power, water, cotton, sugar.

The reluctance of the government to charge appropriate user charges for electricity, and the disastrous Enron project, led to the proportion of subsidy received by the Maharashtra State Electricity Board increasing from 2.4 per cent of its total income in 1996-97 to 15.8 per cent in 1999-2000.

The lift irrigation schemes have been called "another Enron in the irrigation sector" by Madhav Godbole, who headed the committee set up by the state government to renegotiate the Enron tariffs.

The Cotton Monopoly Purchase Scheme, with its high and populist procurement prices, has proved to be another drain. And the less said about sugar co-operatives the better.

A World Bank report on Maharashtra last year pointed out: "During the last five years... salaries, interest payments, pensions, off-budget borrowings, and guarantees each grew faster than the fastest growing item on the revenue side.

Further, "While the revenue expenditure grew at the average rate of 15 per cent between 1994-95 and 2001-02 RE, the capital outlay grew at the average rate of 4 per cent during the same period. When viewed with the increase in the government's deficit financing, this change in the composition of spending indicates the state has borrowed primarily to finance current consumption, that is, to pay for the growing salaries, pensions, and increasing interest payments, which together accounted for 80 per cent of total revenues in 2001-02 RE."

Of course, much of the blame for the bloated salary bill lies with the Centre, as the implementation of the Fifth Pay Commission awards in the state led to a 63 per cent rise in the government's salary bill in 1999-2000. Pension payments have also burgeoned.

On subsidies, the report points out: "The subsidies that are administered through the state's budget have increased from Rs 2,863 crore in 1994-1995 to Rs 4,853 crore in 1998-99... the sectors which have been major recipients of the subsidy include: power, agriculture (cotton, sugar and onion), irrigation, grant-in-aid institutions (particularly education), transport, industry, and food (milk).

The upshot of all this has been that Maharashtra has been slowly losing its pre-eminence among the industrialised states. True, as the state government has been at pains to point out, Maharashtra's debt-service ratio is far from being the worst among the states. But the slippage from fiscal conservatism to profligacy is not in doubt, and it's getting worse every year.

In short, both the Shiv Sena-BJP government and its successor must take their fair share of the blame for the state of government finances. The former started too many half-baked projects at very high rates of interest.

On this, Shiv Sena's former chief minister and former Lok Sabha Speaker Manohar Joshi replies, "It is a fallacy to state that we raised only high-cost debt. The fact is that a small fraction of the debt we raised while in government was high-cost debt that attracted a 17 per cent rate of interest. In the second tranche of loans raised by us, the interest rate was pegged at 12 per cent and the final tranche of loans we raised was at an 8 per cent rate of interest.

But the Congress-NCP government has continued with populist policies, the latest being a slew of sops announced before the polls. How will the new government help to clear the fiscal mess?

"If we come to power, we will initiate an enquiry into the misuse of the huge loans raised by the DF government that was misutilised instead of being disbursed for development projects and works," Joshi said. He added that his party was confident of bringing Maharashtra's fiscal situation under control if voted back to power.

Shinde said he was glad there was now a Congress-led government at the Centre, and that he had submitted a debt restructuring proposal to the United Progressive Alliance government, which he hoped would be cleared soon.

(The first part of the report appeared on Tuesday)