Budgetary blues

It is normal for all state governments to do their budgeting in isolation and not be sensitive to how their individual actions have a bearing on the overall fiscal situation, across governments. This, along with electoral compulsions to dole out soft budgets, spells a sure recipe for crisis at the state level that cannot leave the national fiscal situation unscathed.

That there is a serious deterioration in state finances is well known. But precious little is being done about it. This year, with an eye on the elections, even better-managed states like Karnataka and Tamil Nadu have presented budgets without any fresh taxes or heightened resource mobilisation efforts.

Indeed, Tamil Nadu has withdrawn the agricultural income tax. Quite predictably, a state like Uttar Pradesh has run up a deficit of over Rs 600 crore. It is nonsensical to say, as is being done, that the deficit will be met through higher tax buoyancy. If that were so, that should have been factored into the estimated receipts. In other states, where a vote- on-account is being presented, there cannot be any fresh imposts.

Yet all these states will apply a growth factor to their expenditure, resulting in an increase in the already high deficits. In every state budget presented so far this year, deficits and debt have fed on each other and the situation is now spiralling out of control. The possibility of a full-blown financial crisis in some of the states seems very real "" especially if interest rates start climbing.

All this will rub some sheen off the 'India shining' campaign. State budgets, more than the Union budget (except in the case of personal taxes), affect the lives of citizens very directly. So what is likely to happen is that there will be a lot of unpaid bills, deferring of liabilities (by issuing out-dated financial instruments like hundies), no salary for corporations that depend on budgetary support, and then deferred salaries for civil servants. The next stage would be default on repayments and interest commitments. What would happen in such a situation to capital and other developmental expenditure, can easily be imagined.

Yet, undeterred by the fact that the Planning Commission is deferring the finalisation of state plans and central assistance to state plans, state governments are leaving large unfunded gaps in their budgets. It can be argued that the states are optimistic about the Planning Commission giving them the required assistance later on. The fact, however, is that the state governments are doing this only to present to an unsuspecting public the promise of a large plan, which is a proxy for higher capital and developmental expenditure.

That all this is happening just before the elections is making the state governments go overboard in inflating their plans.