Maharashtra in the red

Print edition : March 02, 2002

The working class in Maharashtra is hit the hardest as the NCP-Congress(I) government resorts to tough measures to fill a depleted treasury and reduce deficit.

FACTORY employment has remained stagnant here for the last 20 years. Electricity is more expensive than in any other State. Government-sector schools are being closed. Healthcare does not serve if you cannot pay. Farmers, deep in debt, are committing suicide in increasing numbers. Industrial production is down.

Maharashtra has lost its edge. A State once considered the most prosperous is now broke. With a Rs.70,528-crore debt and falling revenues, its fortunes are down.

Economic growth has tumbled. A World Bank team found that Maharashtra's growth rate between 1995-96 and 1999-2000 was 4.8 per cent, lower than 22 other States. Even Rajasthan and Kerala, which were regarded as laggards in industrial activity, outranked Maharashtra, once considered an economic trailblazer. While the mess is not directly linked to the fall in economic growth, recessionary tendencies may make it more difficult for the State to come out of the red.

Maharashtra's debt has more than tripled in the last seven years. Its finances were relatively stable until the Shiv Sena-Bharatiya Janata Party government came into power in 1995. "After 1995, the government's economic status deteriorated, both in terms of fiscal stability and economic growth. The proportion of debt to State Domestic Product (SDP) rose sharply from 11.6 per cent in 1995-96 to 18.93 per cent in 2000-01," says Anupam Dasgupta, who until recently was the State's Principal Finance Secretary. The State now owes more than it owns. Its liabilities were higher than the value of its assets by a margin of Rs.3,263 crores in 1998-99, according to a White Paper on the State's finances published by the Congress(I)-Nationalist Congress Party government when it came to power in 1999. With the coffers empty, Maharashtra's overdraft period with the Reserve Bank of India (RBI) is likely to increase to 70 days, estimates Union Minister of State for Finance Balasaheb Vikhe-Patil. It was an average of only eight days in the early 1990s.

Unsustainable borrowings led to the State's downfall. Spending has multiplied more than 23 times since 1994-95. The revenue balance, which explains the extent to which borrowings of the government are used to finance non-productive revenue expenditures, was a positive Rs.277 crores in 1994-95, indicating more revenue income than expenses. It declined to a negative Rs.6,224 crores in 2000-2001.

Most of the loans are being used to meet revenue expenses, rather than to fund productive investments. Spending is mainly on salaries and interest payments, which took up 49 per cent and 19.07 per cent respectively of revenue expenses in 2000-01. The percentage of borrowings used for capital expenditure fell from 137 per cent in 1994-95 to 45 per cent in 1999-2000. Even existing assets are deteriorating.

Says Madhav Godbole, a former bureaucrat who headed a committee which examined the State's finances: "There is a grossly inadequate (budgetary) provision for the maintenance of capital assets created in the past. The provision for maintenance of roads was hardly 45 per cent of the amount required based on all-India norms." Spending on development fell from 55 per cent of total expenditure in 1994-95 to 49 per cent in 1998-99.

THOSE paying the price for the mess are the working class. With every department pruning expenditure, the social sectors have been affected. User fees were introduced in public hospitals, which were once free. "Public health expenditures have fallen from around 1 per cent of SDP in the late 1980s to 0.6 per cent in 1998-99. Declining investments in health have driven more people to utilise the private sector. Patients have had to bear the burden of structural adjustment. For them, health costs have increased three-fold for inpatient care and by 50 per cent for outpatient care in the last decade," says Ravi Duggal from the Centre for Enquiry into Health and Allied Themes, a public health research centre.

Education has suffered owing to cutbacks. The government decided to stop grants to English-medium aided schools. Fee levels rose steeply, sparking protests by parents and teachers, which forced the government to reconsider its decision. Teachers' salary payments have often been delayed for months. A large number of government-sector have been closed, and in Mumbai alone the number of students in these schools fell from seven lakh in 1996 to 5.5 lakh in 2001. "Policies are geared towards privatisation of education, making it more expensive and unaffordable for a large section of the population. It allows the State to withdraw funding, which is already a meagre 2.8 per cent of SDP, as compared to the recommended 6 per cent. The Ambani-Birla report on education says that it should be reduced to 1.8 per cent, which shows the direction they want to move towards," says K.K. Theckedath, convener of the Maharashtra Coordination Committee of Teachers' Organisations. Scholarships for poor students have been cut by 60 per cent, he adds.

Measures taken to fill the treasury and reduce deficit have hit the common man most, says Prabhakar Sanzgiri, secretary of the Maharashtra unit of the Communist Party of India (Marxist). "Irrigation charges have more than doubled. Electricity rates for the poorest sections have tripled in the last five years. Cotton growers, who had been assured a fair price under the monopoly cotton procurement scheme, have not been paid the full amount. Employment guarantee schemes, a major source of work for the unemployed in rural India, have not been started because district administrations have not yet received funds. Development projects have been stalled owing to lack of funds. Hospitals and dispensaries are not being maintained properly or stocked with medicines or equipment, Sanzgiri says.

While development is being curbed, unproductive expenditures continue to erode funds. The salary bill rose mainly owing to the implementation of the Fifth Pay Commission recommendations. Interest payments have risen for two reasons. "First, with liberalisation, interest rates on our loans from the Central government against small savings borrowings were increased to market rates. Secondly, the Shiv Sena-BJP government floated several irrigation and infrastructure development corporations, and borrowed indiscriminately at high interest rates, using inappropriate debt instruments. The projects remain half-built owing to lack of funds and no returns on investment is likely for years," says J.S. Sahani, State Financial Reform Secretary. The White Paper adds: "There are no projections or even expectations of any revenue generation from these schemes, which would help defray the debt servicing liability. In some cases, high-cost solutions seem to have been adopted where cheaper and more affordable options were available."

Other discrepancies in State irrigation and infrastructure corporations were brought to light by the White Paper. Short-term bonds were floated for the Krishna Valley Development Corporation. Interest rates for the bonds were 17.5 per cent, although comparable bonds offered around 14 per cent. Construction costs rose to Rs.11,660 crores compared to the initial estimate of Rs.7,100 crores. Corruption is alleged in its execution. The Chief Engineer was trapped by the Anti-Corruption Bureau.

The State is estimated to have lost around Rs.2,000 crores following its shady deal with the Dabhol Power Company, which compelled the Maharashtra State Electricity Board to buy power from the DPC at a rate higher than other suppliers. This amounted to a direct subsidy to the DPC, says Dr. Vivek Monteiro of the Centre of Indian Trade Unions (CITU). While the full impact of the DPC deal is yet to be known, some official estimates suggest that it could be Rs.60,000 crores over a ten-year period.

While expenditures have kept mounting, tax collections have been down: they declined further from around 8 per cent of SDP in 1994-95 to 7.5 per cent in 1997-98. In States like Tamil Nadu and Karnataka, it is around 10 per cent. "A lot of revenue has been forgone due to the package scheme of incentives given to industries," says Sahani. While sales tax collections have decreased due to the shift from manufacturing to services, the growing service sector cannot be taxed by the State. The State hopes it will be able to mop up taxes from the service sector when the Central government introduces value added tax in April 2004.

THE Congress-led NCP government claims to have tried to clean up its act. It has reduced net government borrowings from Rs.8,728 crores in 1999-2000 to a projected Rs.6,673 crores in 2001-02. The reforms it boasts of may be a bitter pill for the public to swallow. User charges in public health, irrigation, agriculture and animal husbandry have been increased. Increases in other sectors are in the pipeline. The government has declared 8,300 government employees as surplus and has frozen dearness allowance and bonus payments. Around two million teachers and government employees have been affected by the cuts, says Sanzgiri.

"The government has given up its old policies, but it is clear that the new ones haven't worked either. The situation has deteriorated in many States over the last 10 years of economic liberalisation," says Dr. Monteiro. "The kind of reforms that are needed are not the ones that the government is taking up. In every sector, it is moving towards privatisation and liberalisation, rather than making any serious effort to keep the public sector strong and viable."

The Confederation of Indian Industry (CII) has prescribed a strong injection of public investment to revive the economy. "Maharashtra's infrastructure is not in such good shape any more. Other States have caught up. The government has ignored the agricultural sector and rural infrastructure investment for too long. Agricultural growth is needed to spur industrial investment by expanding demand," says Uma Oberoi, Director, CII, Maharashtra.

While the State needs a strong shot of public investment to boost its economy, the current direction of fiscal reforms seems to be contrarian. It remains unclear how Maharashtra will manage to stay afloat.

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