The Myth of Fiscal Prudence

On 6 May, 1993, employees of the Odisha Secretariat had attacked then Chief Minister Sri Biju Patnaik. The employees were angry over the austerity measures that the State Government had taken, which included delayed payment of salary and reduction of other benefits. Indeed these were hard times for finances of states. Not merely Biju Patnaik was struggling to pay salaries, but also every other Chief Minister and we cannot blame them.  Economic growth in the country was sluggish. Revenue collection by the Central and State Government was not increasing and expenditure was steadily rising. There was a huge balance of payment crisis.

The Indian economy was stuck at 3.5 % of GDP growth for decades, euphemistically called the Hindu rate of growth, and needed radical reforms, which were carried out beginning in 1991 by the Congress Government at the Centre with Sri Manmohan Singh as Finance Minister. In a decade, around the year 2001 the first generation of economic reform had helped the economy to grow much faster, close to 8 %, with 2007-08 being possibly the best year since independence and India had successfully bucked the trend of global recession.  With the economy in the country growing at a higher rate the revenue situation of the Central and State Governments improved. How justified is it for Mr. Naveen Patnaik’s Government to take credit for economic reform and the consequent growth?

The Economic Survey 2011-12 published by the state Government candidly admits in Para 9.3 that Odisha is heavily dependent on central transfers for its resources. “In 2010-11, central transfers constituted about 52 percent of its total revenue receipts. Of these, tax devolution is the largest component.” In terms of Tax devolution, as per the 13th Finance Commission recommendations the survey admits, contrary to propaganda by the BJD that “In terms of state-specific grants, Odisha has been awarded the second largest amount after Bihar”(p.343).

The improved revenue situation has been leveraged by the Central Government to start many developmental programmes, thereby unburdening the states. Rural employment, health infrastructure, urban renewal, primary education, rural roads etc have experienced unprecedented levels of central government support and investment. These have unburdened the states, who now have the fiscal space to start some development programmes of their own.

As part of the process of reform VAT (Value Added Taxes) was implemented in India. The first state to implement VAT was Haryana, slowly all other states followed. VAT has improved collection of Sales Tax in all states including Odisha. Should the credit for introduction of VAT be claimed by the State Government? The contribution of state’s own earnings as a ratio of Gross State Domestic Product (GSDP) has remained almost same in the years since introduction of VAT and much lower than the better performing states.

The demand for iron ore in the world market, particularly China, has boosted mining and related activities helping growth. Odisha being a mineral rich state there was an unprecedented level of rise in export of iron ore. Does Mr. Naveen Patnaik want to take credit for the China factor boosting the mining business or the general buoyancy in global commodity market? In fact, should the State have allowed such over-production and export, while claiming ‘value addition within the state’ as the main plank of the Government’s industrial policy?

Odisha was the first state in the country to carry out power sector reform stopping drain on the state revenue because of populist pressure for free or unsustainable pricing of power and the many inefficiencies causing losses. But, this reform was done by the previous Congress Government and not the present Government. Should therefore Mr. Nabeen pattnaik take credit for power sector reform also?

The increase in Plan size has been witnessed across all states. But, it is worrying that in critical areas of plan expenditure like irrigation the performance of the state has been poor. Year after year no expenditure has been made in the proposed new irrigation projects. This also explains the priority of the state Government in a state where an overwhelming percentage of people depend on single-crop dry land subsistence farming. How can the plan outlay for irrigation remain largely unspent when the need is to benefit from improvement in state finances?

The Congress Government in 1995-2000 realised the need to control un-bridled Governmental expenditure rather than be populist and swallowed many bitter pills as austerity measure to improve the fiscal health of the state in the long run. Of course, subsequently the Twelfth Finance Commission forced all states to enact Fiscal Responsibility and Budget Management (FRBM) Act and the state complied by passing the FRBM Act, 2005. The Thirteenth Finance Commission asked the state to amend the FRBM committing the state to deficit targets – zero revenue deficit and fiscal deficit at three percent of Gross State Domestic Product (GSDP). As per the regime created for transfer of federal funds, without FRBM the state Governments would not get any money. All states have to comply and they have complied. Is it justified for the state Government in Odisha to take credit for FRBM? Tomorrow, Goods and Services Tax (GST) may become a reality and help fiscal consolidation. I will not be surprised if the State Government then starts taking credit for GST. Similarly, the BJD is ambiguous about FDI in multi-brand retail. The fact is the present Government has opposed economic reform, indulged in rank-populism while claiming credit for success of the reforms initiated by the Central Government. There is no doubt that BJD maintains well-oiled machinery when it comes to propaganda.

So, the question is what exactly has been done by the state Government by way of policy measure or administrative initiative to justify the claim of prudent fiscal management? This was a period when many states have really forged ahead. After receiving 150 thousand Crore of Central transfers and after ruling Odisha for 12 years the time has come to confront the State Government with some hard statistics.

• Going by most poverty estimates, among states, Odisha still has the highest percentage of people who are poor.

• In terms of health indicators like infant mortality and nutrition levels etc Odisha is one of the lowest in the country.

• We still have one of the highest levels of unemployment, both absolute and seasonal. In fact, organised employment which was 7.98 lakhs in the year 2000 declined to 7.31 lakhs by 2010. What is the value in following a strategy of industrialization if availability of jobs in the organized sector has declined after a decade of supposed economic turn-around?

• Only 22% of the households have toilet facilities within their premises compared to 46.9% for India as a whole and as many as 76.6% of the households practice open defecation  compared to about 50% for the country;

• 43% of the households have electricity compared to the national average of 67.3% and as many as 55.3% of the households are dependent on kerosene for lighting compared with 31.4% for the country;

• Only about 14% of the households have access to tap water supply compared to the all India figure of 43.5%.  The State also has the largest percentage of households with drinking water away from their premises (35.4%) compared to 17.6% for the country;

• 35.6% of the households have mobile telephones compared to the country average of 53.2%;

• Only 9.8% of the households use LPG against the average of 28.6% for the country.  As many as 65% of the households are dependent on firewood for cooking as against 49% for the country;

• Only 26% of the households have TV sets compared to the National average of 47%;

• 45% of households availed of banking facilities compared to the all India average of 59%.

• Odisha has the highest levels of vacancies in key sectors like health and education. So, how are hospitals without doctors and schools without teachers delivering health care and education or are they not important indicators of performance?

So, who has benefited from all the Central funds, 150 thousand Crore of it? Have they reached the people who need it most or have they been eaten by white ants? Has growth been inclusive? Have unemployment level declined? Have we done as well as we could have? The present Government is clueless about managing the state economy and their claim of fiscal prudence is a myth. They have taken advantage of the general lack of awareness in society about complex issues in fiscal management to take credit for the improvement to state finances in India. The time has come to call the bluff.