State in for bad financial times

By Roy Mathew

THIRUVANANTHAPURAM, OCT. 14. The State's current financial position and future outlook appear to be grim. It would be facing Plan cuts and further cuts in other expenditure in the coming months.

Indications are that the difficulties would continue at least for the next two years unless drastic decisions are taken. However, the present Government lacks time and the will to address the issues.

A temporary reprieve may come if the loans being negotiated with the World Bank and the Asian Development Bank come through. The World Bank is scheduled to take a decision on a $ 89 million loan next week. The Asian Development Bank has approved technical assistance for the State. However, the actual disbursal of the loan may be delayed beyond this financial year as various procedures are to be completed.

These loans are not intended to meet the Government's day-to-day expenditure. However, the flow of funds, which would not be spent immediately, will help it tide over its ways and means problems with the Reserve Bank of India.

For quite some time, the Government had been following the unhealthy practice of making short-term borrowings to meet its day-to-day expenditure. This had compounded the debt burden of the State. Recently, the Government defaulted payments to the cooperatives from which loans were availed of to avoid closure of treasuries. This in turn upset the finances of the cooperatives.

By borrowing from companies and cooperative and other banks, the Government is in effect diverting money meant for development assistance in the agriculture, industrial and service sectors. The effect of frequent borrowing by the Government from these institutions could not be quantified, but it is sure to have hindered the pace of development in the State. The amount diverted thus is more than Rs. 1,100 crores, including Rs. 570 crores mobilised as bonds for infrastructure development.

The State had been experiencing a gap of 2 per cent in the growth of resources mobilised and expenditure in recent years. The Government could not step up tax efforts to bridge this gap. Though the Government had listed a number of measures to shore up non-tax revenue immediately after its coming to power, hardly any of these were implemented owing to political compulsions. Massive evasion of taxes continues at check-posts.

The situation was compounded by the dip in the buoyancy of tax receipts in 1998-99. The tax revenue had been growing for several years in the past at an average rate of about 17 per cent. It had even touched 24 per cent. However, this dropped to just 3 per cent in 1998-99. Though a recession in the agriculture sector was attributed as the reason for this, it was also the result of poor tax efforts. Many got away with concessions and lower tax returns in the name of recession. Though tax collection has now improved, it is yet to touch the earlier levels of buoyancy.

The State is currently spending 62 per cent of its Budget for pensions, salary and debt servicing. Only the balance is available for development and other expenditure of the Government.

The Government has also run into problems of late over the guarantees given by it for loans availed by public sector units and other agencies. This amount comes to about Rs. 6,000 crores to Rs. 7,000 crores. Some of the repayments have been defaulted. Already banks had invoked guarantees to the tune of about Rs. 40 crores to Rs. 50 crores. Now, the Reserve Bank has specified that the banks should make provisions for non-performing assets, including loans given on Government guarantees. It is feared that the banks would be invoking more guarantees in the coming years to improve their balance sheets.

According to officials sources, there are a number of measures that the Government can take to improve its finances, apart from stepping up taxation efforts. Computerisation of check-posts can help check tax evasion. Performance budgeting could be introduced to streamline expenditure. The accounts could be changed from cash to accrual basis, which could serve as a check on accumulation of arrears of payments. The Government should formulate a capital expenditure policy for a five to ten year term. The capital budget should be hived off the Budget.

They said the Government has not defaulted seriously on payments. Its fiscal self-reliance index is still the best. The GDP growth could sustain the debts. However, they do not expect major steps now as the term of the Government is nearing completion. The Election Commission has not accepted the Government's suggestion that the Assembly polls could be held in April. This means that this Government would not be presenting the next Budget. Even if this Government would be presenting the Budget, it would not go in for hard decisions in an election year.

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Section  : Southern States
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