The prime ministerís meeting with state chief ministers has led nowhere. He reportedly said that now that there was a consensus between the Centre and states on power sector reforms and agriculture, one on fiscal imbalances should emerge. There is indeed a consensus within the country and without that combined fiscal deficits are exceedingly high and are eating into development expenditure, apart from upward pressure on real interest rates and monetization of deficits, the latter contributing to inflation. And the prospect of state-level default is not that remote. However, consensus about fiscal imbalances is not much of a consensus unless one agrees on modalities for reduction. That is where disagreements begin. Nowhere is this as evident as in reducing expenditure on government wages, salaries and pensions.
Such expenditure may not have a significant impact on the Centreís deficit. But the signal is important, and after the fifth pay commission, such expenditure has driven states to bankruptcy. The decision to prepone the retirement age to 58 has been vetoed, as has been the commutation of pensions. Neither the Centre nor states are in a position to absorb the one-time fiscal shock. Suggestions about dearness allowance, leave travel concession and bonus freezes have also died a dusty death, although in all fairness one should acknowledge that Tamil Nadu, Rajasthan, Orissa and Haryana were more favourably disposed. The Madhya Pradesh, Karnataka and northeastern proposal of the Centre compensating states for DA increases is hardly constructive. Nor have states agreed to downsize by identifying surplus manpower and introducing voluntary retirement schemes.
How many states have set up administrative reform commissions' After all, the Centre has set a precedent by setting up such a commission and ignoring its 10-volume report. Perhaps the only way to curb fiscal profligacy is by linking devolution to reforms. The power sector and urban funds mooted in this yearís budget have set precedents. Perhaps the only positive outcome of the meeting was a decision to transfer Centrally-sponsored schemes to states, with the proviso that they are transferred to target beneficiaries within 2 to 3 weeks. The decision to allow states to tax some services is not new and is associated with the expected introduction of value added tax in April 2003, unless that decision is further postponed. Even if VAT is introduced in 2003, local taxes and Central sales tax are unlikely to be scrapped, Rajasthan being the only state that wants CST abolition. Hiking pay scales of the subordinate judiciary is yet another deferred decision, as is the debt equity swap. On the latter, there was disagreement about the formula and the idea that states must pre-pay part of their debt every year. So there will be a committee to examine the issue and another one for the overdraft regulation scheme. A commission of reforms would have been preferable to setting up several committees and commissions. With elections in the offing, politics rules supreme. The prime minister described the meeting as a milestone. Instead, it has confirmed to be the major millstone around our necks.