State governments often guarantee loans made for irrigation and other infrastructure projects including electricity boards. In the former, returns are not direct while in the latter, they are unpredictable. Take the case of Maharashtra Krishna Valley Development Corporation (MKVDC). Money was raised for the project on the basis of a state government guarantee, but the state neither ensured that its internal resources were augmented to meet the payment obligations towards MKVDC nor does it have enough resources at present to meet its obligations. Thus, through some skullduggery in the public accounts of the state, it plans to avoid default. Well, the state may be diverting money from its Contingency Fund so that its not downgraded again. One indeed wonders that if this is the current position of a state which was rated very highly in the past, how much worse is the condition of states such as Uttar Pradesh and Bihar In fact, even for a highly rated state such as Tamilnadu, the outstanding guarantees as on 31st March, 2001 were 68 per cent of the likely revenue receipts. It is for this reason that the Constitution allows states to fix a ceiling on the guarantee limits. But unfortunately this does not seem to have worked. Repeatedly, various Union finance ministers and the Reserve Bank of India have mentioned schemes to improve state finances and curtail defaults, which again have not worked. If India needs to be an economic power, the states which are a foundation for the same have to be strengthened. A default in the foundation endangers the entire structure.