But empowerment of States is just one side of the coin. To deliver on the development front, the States will have to perform and not just rest content with acquiring more powers. The overall record thus far has been uninspiring. Most States’ finances are in a mess and they often have to resort to overdrafts to pay salaries to their employees. The latest figures show that the States’ combined fiscal deficit had increased to a high of 3.6 per cent of GDP. In 1985–86, this figure was 2.7 per cent.
Disturbingly, the States’ fiscal deficit is rising not because they are spending more on development. The bulk of the States’ expenditure is devoted to salaries and pensions, interest payments, and covering losses of public enterprises or losses incurred by electricity and irrigation boards. The interest burden on States has risen from 1.4 per cent of GDP in 1985–86 to 2.3 per cent now. Not surprisingly, their development effort is faltering: capital expenditure on social and economic services has fallen from 3.1 per cent of GDP in 1985–86 to around two per cent now. The States’ expenditure on key social services like health and education is falling as a proportion of their total expenditure. Likewise, their commitment to developing critical infrastructure has weakened. They are unable to find resources even for maintenance of existing roads, public transportation systems and irrigation facilities. They cannot meet the growing energy needs of industry and agriculture because the state electricity boards have accumulated losses of over Rs. 150 billion. The urban and rural settlements are in a state of decay. And even as their wasteful expenditures are going beyond control, their taxation systems have lost the ability to deliver the revenue growth needed to plug the widening resources gap.
It will be evident that the three constraints to growth and development I outlined earlier are in full play at the level of the States. Since the States are responsible for a substantial part of the development effort, it is plain that reforms at the Centre alone cannot resolve the issue. The answer clearly lies in reforms at the State level: reforming States hold the key to India’s economic future.
Fortunately, some States have seen the writing on the wall and launched welcome initiatives. Orissa, Haryana, Andhra Pradesh and Uttar Pradesh have launched comprehensive power sector reforms to dissolve their electricity boards and establish separate companies for generation and distribution of power, and have drawn up plans for privatisation of both generation and distribution. They have set up regulatory agencies to eliminate government’s interference in the power sector, and to set tariffs for various categories of consumers. Hopefully, the huge subsidies being doled out will now be phased out and the power sector in these States would become financially sustainable. The power reforms experiment in these four States has motivated other States like Karnataka to launch similar reforms. Incidentally, these five States are ruled by five different political parties.
Similar initiatives have been launched in other areas of infrastructure. Karnataka and Andhra Pradesh have created infrastructure funds to boost investments in large infrastructure projects. Andhra Pradesh and Gujarat are upgrading their State highways and are revamping their road departments to improve the quality of road construction and maintenance. Many States are seeking private investors to rebuild high-density corridors into toll-based highways or expressways. Almost all States along India’s large coastline are inducing private investors to build new ports on a BOT basis.
Some States have also launched new programmes in the social sector. States like Rajasthan, Uttar Pradesh and Madhya Pradesh have embarked on improving their primary school systems to universalise primary education. Andhra Pradesh and Karnataka are reforming their health systems to improve the quality and reach of health services. Some States have launched ambitious programmes for reproductive health and women and child development. Kerala and Tamil Nadu have already reached the replacement level of fertility of 2.1.