EGS meant for rural areas, was funded by an urban tax, with a matching grant from the state budget, and all monies thus collected were specially earmarked, and if required rolled over from year to year. EGS has now been running for almost 30 years, and a testimony to its success is that subsequently the central government launched it nationwide, in the form of Employment Assurance Scheme and the Jawahar Rozgar Yojana. The point of this tale is not to praise the innovation of EGS, but to highlight the can do spirit of Maharashtras leaders, and their willingness to take an unpleasant hard decision (tax urbanites) to push through something beneficial (EGS).
Contrast this with the situation today. The fiscal health has gone from bad to worse. Revenue deficit alone is almost half the fiscal deficit of Rs 6,500 crore. Even those earmarked unspent funds of the EGS are being eyed for other profligate purposes. The woes of the states electricity board are too well known, and it gets a subsidy of more than Rs 2,000 crore. Many government run sugar and spinning mills cooperatives are in distress. In the last ten years, the states gross domestic product has only doubled, but borrowing has increased by seven times. An increasing portion of these borrowings are through state owned enterprises, and are off-budget debts, which dont pass through legislative scrutiny. In fact, they have risen so much that even the Reserve Bank of India is worried, and rating agencies have reflected that through downgrades. The number of days that the state utilises the overdraft from RBI annually, has risen dramatically. More than 85 per cent of annual revenue receipts now, simply go to pay for salaries, pensions and interest on debt all non discretionary items. The burden of subsidies makes it impossible to pay adequate attention to core functions such as primary education, public health and law and order. The state is close to having to declare a financial emergency. It is desperately seeking a World Bank loan, which it will get only after satisfying the lender of its own fiscal rectitude. Thus unpleasant decisions, such as a revamp of the cotton monopoly purchase scheme, or a reduction in power and irrigation subsidies, will probably be blamed for the Banks loan conditionalities, rather than on being acknowledged as the right medicine.
The state needs to desperately increase capital spending, by which I mean political capital. This means taking harsh decisions, cutting out non-merit subsidies, aligning incentives to better reflect market reality, getting the government out of non-core activities, pricing guarantees given out to state institutions properly and so on. In short, catching the liberalisation train which left the station ten years ago in 1991. As we all know that the second generation of reforms requires that the baton of liberalisation be passed on to the states, and Maharashtra needs to play a leadership role, if it wants to regain the position of preeminence. Otherwise it will only lag behind states like Andhra Pradesh. Incidentally AP has already received that fiscal discipline-tied World Bank loan.
Maharashtra has lost the economic leadership role that it had enjoyed in the past. And lest it may be deduced that these problems are only recent, let me remind of at least two ignominious distinctions earned by the state back in 1993-94. In an exhaustive study of rural households across 15 major states, the National Council for Applied Economic Research had found that Maharashtras rank on Human Development Indicators was third from bottom, only ahead of Orissa and Bihar. The other distinction was that Maharashtra occupied the first place for subsidies paid out in 1993-94. Even Maharashtras urban-rural divide has always been above the national median. The fact that its growth rate has been as high as 8 per cent until recently, only hid the intra-state growth disparities. Leave out the Mumbai-Pune-Thane corridor, and the states growth record looks pedestrian.
Mumbai is still the migrants destination for realising an economic dream. This years Padmavibhushan winner Gangubai Hangal, said that she felt proud that this time so many Maharashtrians had been honoured. The states glory can follow only with striking the right economic chord.
Ajit Ranade is Chief Economist, ABN Amro Bank, India