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STATE ELECTIONS 2006

Do State Governments have money to throw?

Monday 15 May 2006, by VENUGOPAL*K

State finances are in much better shape than they have been. Simply put, their revenues are growing much faster than their expenditure. In such a congenial situation, governments must prioritise basic needs.

BY ELECTING the DMK-led alliance, voters in Tamil Nadu booked themselves rice at Rs.2 a kg at ration shops, a waiver for cooperative farm loans, and free colour television sets. When the DMK made what many thought was an extravagant promise to the electorate last month, its president, M. Karunanidhi, was at pains to explain that the schemes would not be a burden on the exchequer. Together, he said, television and rice would cost about Rs.1,070 crore a year (considering that the television sets would be distributed over two years and not all of them in one year), and that sum was not much in a Rs.30,000 crore State budget. Indeed the projection for 2006-07 made by the Jayalalithaa government in January 2006 was that State revenue would rise to Rs.34,046 crore and the revenue deficit would contract to Rs.207 crore from over Rs.1,404 crore budgeted for the previous year. The outlays on rice and television would only push the deficit back to where it was; the farm loan waiver at Rs.6,866 crore though may tip the scales more sharply.

It may be debated whether State governments should be spending the tax-payers’ money on waiving loans, selling rice cheap, and gifting television sets rather than on schools, roads, and water supply, but the fact that ought not to be lost sight of is that State governments virtually across the country have much more money to throw than ever before.

A Reserve Bank of India study of State budgets of 2005-06 acknowledges that State finances are in much better shape than they have been. Simply put, their revenues are growing much faster than their expenditure. It may be useful to look at the numbers the study came up with: The total expenditure of 29 State governments, at Rs.455,040 crore in 2005-06, was 6.1 per cent higher than the previous year. On the other hand, total revenue, though still short of expenditure at Rs.430,270 crore, grew 11.9 per cent over the previous year. The revenue deficit has therefore come down from Rs.61,145 crore to Rs.24,770 crore. If the trend in revenue growth is maintained - and there is no reason to doubt that - many States could report a revenue surplus in the next few years.

Tax revenue up

State governments are clearly reaping the rewards of faster economic growth. The 7-8 per cent growth in the country’s gross domestic product over the past three years has substantially enlarged purchasing power. That is reflected, even if in a somewhat exaggerated manner, in sales tax collections of State governments. Under the new value-added tax (VAT) regime, sales tax collections are growing at 16 per cent as people buy more goods and build new homes. The boom in vehicle sales helps State governments doubly: more taxes are collected on vehicles sold; and rising fuel consumption means revenue from sales tax goes up faster - 40 per cent of sales tax comes from petro goods such as diesel and petrol.

This is not to suggest that State governments are on velvet. Most States still run large deficits and need to borrow to meet current expenditure. The profligacy of the past continues to cast a dark shadow: the overall debt outstanding for the 29 States is almost three times their combined annual revenue. But what the past three years have demonstrated is that if they can attend to their economies, attract investments, raise gainful employment opportunities, they will be rewarded more than commensurately with tax revenues. How they will spend the tax revenues is crucial to sustaining the flows. Providing the infrastructure and delivering basic needs such as affordable grains for everyone, drinking water, cooking fuel, and electricity to every household, school education for all children, and a road to every village are clearly priorities.

Six decades after Independence, the fact remains that none of these needs has been fully met. Census 2001 revealed that six out of ten households do not have water in their premises. One in two households in rural India does not have electricity. Seven out of ten households cook with firewood or dung. Remedies for these are cynically reckoned as burdensome; instead they must be viewed as investments that will deliver a more competitive economic workforce.

For instance, piped drinking water and better cooking fuel in every household will free 100 million women from a couple of hours of drudgery every day, time that they can deploy more productively for the economy. To put this in perspective, the entire organised sector work force of 20 million does not put in as many man-hours a day.

Government expenditure on ensuring universal school education and vocational training can produce its own elevating effect on economic capability.

It is important that political parties recognise the value of providing basic needs. These may lack immediate voter appeal, may require extensive fieldwork, careful planning and execution but will have lasting economic impact. On the other hand, the temptation for political parties to promise instant gratification in the form of loan waivers or free sarees is still too high.

The DMK’s offer of free television sets to the five million have-nots was clearly the novelty in the political discourse. On the store window was a "fun-thing" in addition to the old, dreary ration items. It would appear from the new excitement the campaign generated that the offer of television sets went down well among the voters. It will not be long before other political parties across the country adopt this new tack. Would it matter that one in every two rural households in the country (one in four rural households in Tamil Nadu) does not have electricity to power the television set?

See online : The Hindu

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