Alarm bells are ringing

As recent reports of financial distress from Jammu and Kashmir, Assam, Rajasthan and Punjab show, there is scarcely a state government that is not struggling to make both ends meet. Bihar is in the deepest trouble already but is not the only big state in the red. Maharashtra, whose finances have been reasonably well managed in the past, presents a particularly troubling picture. Luckily it is still able to pay its teachers but the descent into the red has been precipitous proving how easily fiscal prudence buckles under political pressure. It is small comfort that the present financial crisis in the states was foreseen because in this instance forwarned has not meant forearmed. Although the Reserve Bank of India, among others, has warned year after year about the deteriorating fiscal situation in the states it has been to no avail. The states simply do not have the political will to cut expenditure and subsidies especially when it is possible to go on accumulating debt and be bailed out by the centre.Although this state of affairs has been changing, it is not changing fast enough. The restructuring of centre-state fiscal relations has been a slow process. Meanwhile state debt has doubled in the last decade.

As financial problems mount, it is rare, even ten years after the reform process began, to find a chief minister who is prepared to undertake serious and systematic fiscal reform. This has got to change, perhaps with more stick than carrot from the centre. When providing partial debt relief the centre should insist more firmly on appropriate performance targets which could be privatisation of state enterprises or energetic efforts to improve the revenue side or visible steps to prevent misuse and waste of public funds. Strategic states or those considered 8220;politically sensitive8221; are usually very successful at getting the centre to pull their chestnuts out of the fire. Farooq Abdullah recently threatened to resign if his financial demands were not met. Anywhere else this would be called blackmail.But Abdullah was assured Jamp;K would get all it needed. It is certainly right to invest more in the development of Jamp;K but the same performance standards must be demanded of the Abdullah government as of any other government. Financial discipline, transparency and accountability are as essential in Mumbai as in Srinagar or Chennai.

The process of fiscal consolidation must be pushed forward vigorously. Punjab8217;s finance minister is on the right track when he talks of cutting expenditure. Every bit counts and his ideas at the moment are quite modest. If he really intends to downsize the bureaucracy he will have to think of freezing new recruitment. Indeed, states have no choice but to think on those lines since the Pay Commission awards swelled salary and wage bills. Resource mobilisation is poor almost everywhere. Taxing agriculture may not be an option as yet but recovering gradually the full cost of services like the supply of water and power to farmers is possible if linked to improvements in the services.There are other avenues as well such as sharing investment costs with beneficiaries. A start has to be made.