At a National Development Council meeting a few months ago, there were apparently fireworks. Some states are believed to have asked the Centre to push ahead with reform in many concurrent subjects in the Constitution—such as labour and education. One financially strong state even floated the idea for legislation on firing workers. Some others backed the demand.
Quietly, behind the scenes, the states are pulling their weight in the reforms debate. They have been encouraged to do so by their improving financial health and reversing a long trend of depending solely on political equations to wrangle more handouts and grants from the Centre.
In what is seen as an unbelievable turnaround, the consolidated fiscal deficit of the Centre and states, which mirrors the total annual gross borrowings of all governments, has dropped from close to 10% at the start of the decade to only 6.5% in 2006-07, and could drop further next year. Almost all 29 states hope to rein in their fiscal deficit below 3% this year. In terms of the revenue deficit, which is the gap between the revenue income and current expenditure, the states are close to wiping it out this year, and would have done so last year had it not been for two especially spendthrift members.
More important is that states have been able to do this ahead of the deadline of 2008-09 given to them by the 12th Finance Commission. Which is the same deadline the Union government gave itself, through the Fiscal Responsibility and Management Act, and probably will make it for the fiscal deficit, though not for the revenue deficit.
Why are buoyant state revenues cause for celebration? States having money left over after paying salaries and office costs means they can now develop roads and irrigation or set up schools and hospitals, something that always gets neglected in poorer states. That is somewhat of a vicious circle, because the burden of weak administration falls particularly on the poorest in terms of services denied and administrative indifference. Residents of a poorly earning state usually remain poor, unless they migrate.
Thanks to better fiscal discipline states that have been blessed with good flow of revenues and those which are also growing decently, are now concentrating on development, wooing industry, and finding it easy to pick up cheap 10-year loans from the market. The more developed states such as Gujarat, Tamil Nadu and Karnataka are gathering strength, and even the rear is brought up by the perennially problematic ones such as Orissa, Uttar Pradesh and Bihar.
As a natural corollary, many of these are increasingly keen on both economic policy and governance reforms. For instance, many states have computerized their land and revenue records, and made their own below-poverty-line lists. The immense gains from these have prompted some of these to push the envelope on more ambitious reforms. Keen to woo private industry as well as create more jobs, state governments are now devising ways and seeking cooperation to tame labour laws.
Many of these states, such as Chhattisgarh and Madhya Pradesh, are even empowering their grass-roots governments. These two states, according to a forthcoming paper by the National Institute of Public Finance and Policy, have the highest per capita devolvement—Rs2 per day—among states to their three-tiered panchayats.
This development 14 years after the 74th amendment of the Indian Constitution paved the way for establishing a unique 250,000-strong governance unit at our districts, blocks and villages shows that democracy is indeed stirring.
If India’s federation of states can wrest the reforms initiative from the Centre, then it will mark a major turning point for the country.
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