Financial worries

Maharashtra faces a difficult financial situation.

R. PADMANABHAN

IN September, Maharashtra witnessed a series of events which indicated a situation that is worrisome for the State. First, it became public knowledge that Finance Minister Mahadeo Shivankar had written to Chief Minister Manohar Joshi a few months earlier expressing his concern about the State's financial situation. Secondly, contractors working on the ambitious Krishna valley irrigation project revealed that hundreds of crores of rupees were due to them from the Government, which was in turn affecting the work on the project.

A court directive obligates Maha-rashtra to impound its allocated share of the Krishna waters by March 31, 2000, failing which it may forfeit its right to its annual share of 594 tmc ft. The Government had originally planned to complete the entire project, including the construction of canals, by that date. However, on September 11, it announ-ced its decision to postpone the construction of the canals (which would have cost an estimated Rs.4,000 crores), and utilise available resources to build the dam structures before the deadline.

In yet another development, Governor P.C. Alexander took the extraordinary step of summoning Finance Secretary R.B. Budhiraja and Planning Secretary Vinay Bansal to the Raj Bhavan for consultations on September 10, two days after the State Government issued a statement denying that it faced a severe financial crunch. The statement was issued after the publication of a news report, which stated that the State Finance and Planning Departments had sounded alarm bells about the State's finances through a confidential note that was reportedly submitted to Chief Minister Manohar Joshi.

All these events testify to the fact that the State's finances are under strain. Manohar Joshi admits that it is true but insists that the situation is under control. The Government rests its case on three arguments: one, it has not had to seek an overdraft from the Reserve Bank of India (RBI) over the last three years except for a period of two days when a technical failure caused a problem; two, there has been no hitch in the payment of salaries to its employees; and, three, financial institutions have testified to the State's creditworthiness by submitting proposals for a loan assistance of Rs.1,500 crores for the Krishna valley project.

Important sections of the bureaucracy are, however, not impressed with these arguments. The note that was reportedly submitted to the Chief Minister by the Finance and Planning Departments demonstrates fairly convincingly that borrowings "are increasingly being used to finance administrative expenditure, interest and debt payments, much to the detriment of development expenditure, capital formation and investment." It does this through an analysis of data culled from Budget in Brief 1998-99, and Economic Survey of Maharashtra 1997-98, both published by the Government. The note, which roughly estimates the total annual liability of the State on account of the emoluments and pensions to government and quasi-government employees at close to Rs.12,000 crores, states that if the Rs.3,700-crore interest liability for 1998-99 is added to this, it would consume practically the entire Rs.15,200-crore tax revenue mobilised by the State. "This means that the taxes levied by the State go entirely for payment of salaries and pensions of government and quasi-government employees and the interest on its outstanding debt."

Going by the data available in Budget in Brief, the total revenue receipts of the State in 1998-99 are likely to be Rs.1,498.24 crores more than that of the previous year. On the other hand, the incremental liability for the year on account of the revision of pay scales and debt servicing put together is Rs.5,893.45 crores, which is nearly four times the estimated total revenue receipts.

As the bureaucrats' note explains, this means that the Government will have to borrow nearly Rs.4,400 crores "just to pay the increased wage bill and the additional cost of debt service. And such borrowing becomes self-perpetuating." The note observes that unless borrowings are used to finance investment and development expenditure, and not consumption expenditure, it will not be possible to generate enough returns to service the borrowings. The note states: "Maharashtra's record in optimal utilisation of borrowings is not particularly edifying."

The note further states that the proportion of total government expenditure devoted to consumption shows a rising trend, while the proportion devoted to capital formation is declining steeply. Thus, consumption expenditure accounted for 23.3 per cent of the total expenditure in 1995-96, 21.3 per cent in 1996-97 and 28.1 per cent in 1997-98, while the percentage figures of gross capital formation during the three years are 21.2, 18.9 and 13.1 respectively.

Viewing the expenditure pattern in another way, the note points out that total development expenditure accounted for 69.3 per cent of total expenditure in 1996-97, 66.7 per cent in 1997-98 and 50.2 per cent in 1998-99.

VIVEK BENDRE
Chief Minister Manohar Joshi.

The note states that the increasing use of borrowings for financing current non-productive expenditure at the expense of development expenditure, investment and capital formation is "a sure recipe for economic collapse down the road."

The statement released by the Government on September 8 attributed the uptrend in expenditure and borrowings to vital projects undertaken by the State and a provision of Rs.5,000 crores in lump for the revision of pay scales on the basis of the recommendations made by the State Pay Revision Committee 1997.

Informed sources told Frontline that the Shiv Sena-Bharatiya Janata Party Government had been taking up one ambitious project after another evidently without identifying the sources of funds. The projects include a scheme to rehabilitate Mumbai's slumdwellers by providing them with free housing (Frontline, August 28); various Maharashtra State Road Development Corporation projects, including the proposed construction of about 50 flyovers in Mumbai; and a programme to provide drinking water to all villages in the State.

The slum rehabilitation scheme originally envisaged a purely supervisory role and zero financial liability for the Government. The idea was to rope in real estate developers to build the houses in return for the Government facilitating the construction of saleable premises by them. However, the revised scheme that was approved by the Cabinet on September 15 saddles the Government with the ownership of a company, Shivshahi Punarvasan Prakalp Limited, and a debt of Rs.600 crores towards its seed capital.

The announcement of a special development programme for Vidarbha in 1996 inevitably led to the announcement of similar schemes for Marathwada, Konkan and other regions of Maharashtra. The sources observed that new schemes were announced despite the fact that the budget was not able to support even the existing schemes.

In the circumstances, said the sources, the Government seemed impelled to go in for bond issues and other means to borrow with abandon, not to mention the furnishing of guarantees. The gestation periods of quite a few of the projects taken up by the Government are considerably longer than the maturity periods of the bonds floated. Sources wonder how, given the fact that the Government is resorting to borrowing even to service the existing debt, the newly-incurred debt will be serviced five to six years down the road.

Relevant to this is the financing of the Government's Annual Plan for 1998-99. The proposed outlay for this Plan is Rs.11,600 crores, 39 per cent more than that for the 1997-98 Plan. A sum of Rs.5,200 crores is to be raised from extra-budgetary sources, and 84 per cent of the Rs.6,400-crore budgetary provision for the Plan is to be raised through borrowings. Such an increase in government debt means that more and more money will be set apart for debt servicing rather than for capital expenditure.

According to Ram Pradhan, Congress(I) leader and former Chief Secretary of Maharashtra and former Union Home Secretary, one of the main reasons for the State's financial difficulties is the present political leadership's lack of faith in officials. "When the Chief Minister of the State starts criticising the officials," Pradhan told Frontline, "it indicates that his grip on the administration is slackening."

Pradhan said that while the Tenth Finance Commission estimated that Maharashtra would have a surplus of Rs.24 crores between 1995 and 2000, what was actually happening was that the State was heading for a Rs.20-crore deficit for the same period. He seemed to imply that this was because the present Government did not seem to appreciate the importance of optimal utilisation of existing revenues and ensuring that the State got the highest possible returns from expenditure already incurred.

Questioning the high priority being accorded to the construction of flyovers, Pradhan said that even if one accepted the contention that flyovers facilitated substantial savings in fuel consumption, the savings would not benefit the State exchequer to any great extent. On the other hand, the construction of roads and power plants in areas of heightened industrial activity would lead to the creation of more jobs and the generation of more income, which in turn would benefit the exchequer. Pradhan, who advocated special efforts to increase the incomes of farmers, said that this made sense from the point of view of revenue mobilisation by the Government because of the large number of farmers.

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