Rahul causes a tehelka'

By Kshama Sunil

It could not have come at a worse time. The Rahul Gandhi 'interview' has come at a time when the Congress was getting its act together in Bihar along with Lalu Prasad Yadav's RJD and other allies to put its best foot forward ahead of the Assembly polls.

No wonder, the NDA, raring to face the elections, has found it a good stick to beat the RJD supremo notwithstanding the Congress washing its hands off the 'Tehelka' matter dubbing it as a 'so called interview' and the Weekly offering regrets for inadvertent mistakes.

Whether the interview was a formal one or whether it was just informal interaction and casual conversation with the 'heir apparent' of the Nehru Gandhi family, has now become immaterial and what has become relevant is what is in the mind of Rahul, whose word commands weight next only to Sonia Gandhi in the ruling party at the Centre.

Notwithstanding the denials and assertions about "misrepresentations and out of context" presentation of various statements, the first lengthy interaction with the "man who could have become Prime Minister at the age of 25' (yet another misrepresentation?) gives rare insight into what the 'Generation next' in the 'first family of the Congress' is thinking about.

Political observers say that these are not just off the cuff remarks by a young man who is aware of his legacy, but could mean that he is now not too happy to remain just 'MP from Amethi' and his dream is to turn India number one nation in the world.

The Rahul that one comes across in the interaction is the one who is impatient and the one who is not happy about the things around him in the organization, especially in the higher echelons. The question being posed to him often that 'what if we failed' is not upto the liking of the young leader who admits that losing of elections once or twice could help him politically.

The interview has come at a time when it was an open secret that Rahul would be entrusted greater responsibility in the organization by inducting him in the Congress Working Committee. A host of PCCs as also several Congressmen have demanded that he be made an AICC General Secretary. A section of partymen, however, insists that it was upto Rahul whether to become a party general secretary or a Union Minister.

The Tehelka interaction gives more than hints that Rahul is exasperated over the way party politics is being practiced in the 21st century. This is significant as it comes ahead of the reconstitution of the CWC as also the AICC Secretariat.

Also significant is his statement over the state of affairs in Bihar and Uttar Pradesh, which would not be music to the ears of Lalu Prasad Yadav as also Mulayam Singh Yadav. Despite suggestions that 'lack of governance' was a misrepresentation, the fact remains that there was great deal of churning in the mind of Rahul about the two key states in the Hindi heartland, which was bound to be detrimental to the interests of the two Yadavs.

The interview gives much food for thought for Congressmen on how they should conduct in the changing times as it goes without saying that the clout of Rahul is set to rise in the organization in the days to come.

Rahul's formal entry into politics by becoming the Congress candidate from Amethi in 2004 Lok Sabha elections was not an accident. A section of Congress leaders close to Sonia had been impressing upon her for a long while the need to bring him to active politics sooner than later.

Rahul has to fulfill the unfinished dream of his father the late Rajiv Gandhi.

The 'promote Rahul' campaign was also aimed at seeing to it that his sister Priyanka remained in the background. Several Congress leaders, it is being said in the party, had a lesser comfort level with the daughter of the party chief. For the ordinary party faithful, unmindful of the power games at the top, Priyanka reminded them of her grandmother Indira Gandhi.

No less a person than Kalyan Singh, the former Uttar Pradesh Chief Minister, had said a couple of years back at a time when he was not part of the BJP, that only Priyanka could revive the Congress in the state, was a tribute enough for her. It matched with the popular impression that she alone has the grit and determination of the great Indira.

A section of the party feels that the interview showed Rahul had glimpses of his late uncle Sanjay while others felt that he was like his father and his remarks in the interview should not be taken too seriously as he was learning the tricks of politics. This section points out that Rajiv, while reacting to the violence after the assassination of Indira Gandhi, had remarked that 'when a banyan tree falls, earth is bound to tremble'.

Congress leadership set itself in the damage control mode after the interview fearing that the interaction could send wrong signals to several quarters including the Prime Minister as also the allies of the party ahead of the battle in Bihar.

It is not a mere accident that Rahul's interview has been hailed by Union Minister and LJP leader Ram Vilas Paswan, who is at daggers drawn with Lalu Yadav. Needless to say, the last word has not yet been said about the interview, politically. (Syndicate Features)

The crisis of State Government debt

By Sisir Basu

The Central Government has taken it upon itself to extend the terms of reference of Twelfth Finance Commissions to cover issues of fiscal sustainability of State Governments. The statutory job of the finance commissions is usually twofold: to determine the principles for the distribution of the net proceeds of shared tax revenues between the Centre and the states; and to provide for revenue deficit grants from the Centre to those states whose normative expenditures are likely to exceed normative revenues. It will mean a restructuring of the public finances, restoring budgetary balance, achieving macro-economic stability and debt reduction along with equitable growth.

The issue of public debt of State Governments has assumed alarming proportions. The states are effectively crippled with respect to the ability to undertake important socially necessary expenditure. Since the states are dominantly responsible for most of the types of public expenditure which affect the day-to-day life of the people, ranging from law and order and basic infrastructure to health, sanitation and education, the fiscal crisis of the states has meant that these expenditures have been very adversely affected in most parts of India.

The need to restructure the debt of the states has been widely accepted for several reasons. The first is the adverse impact on expenditure, the second is the fact that for some years now, the states have been paying higher interest rates for a variety of reasons.

The rules imposed by the Reserve Bank of India, which require case by case permission to states for accessing commercial debt in that they are running revenue deficits, have also operated to make borrowing difficult and have driven several states to high-conditionality debt from multilateral agencies such as the World Bank and the Asian Development Bank.

The actual patterns of fiscal imbalances across the Centre and the states are worth noting as background. The fiscal deficit of the states as share of GDP was well within sustainable limits, at around 3 per cent of GDP, until 1997-98. Thereafter there was a sharp rise, led almost entirely by the rise in revenue deficit, and this can be traced to Central government measures such as the Pay Commission hikes. However, since the turn of the decade, the states revenue deficit as a share of GDP has been rising even though they have cut spending and improved revenue effort.

The primary revenue balance has been in surplus, sometimes quite sharply so, even as the revenue and fiscal deficits have been increasing, largely because of the effect of the debt overhang and the unduly high interest rates the states have had to pay. This has been further compounded by the decline in Central transfers to states over the years. Such transfers have declined from 40 per cent of the Central tax receipts in the first half of the 1990s to an average of 36 per cent after 1996. Since the Centre's tax revenues have declined as a share of GDP over this period, this has meant an even sharper decline as a per cent of GDP.

In fact, the states tax effort has been significantly better than that of the Centre. So the apparent "lack of fiscal correction" by the states in recent years relates entirely to the debt structure and its implications. While the fiscal deficit declined in the early 1990s, it rose again quite sharply in 1994-95, after financial liberalisation measures raised the cost of borrowing by the Government and led to increased interest payments.

The subsequent rise in fiscal deficit ratios, post-1997, has not only been because of interest payments but because of other expenditures essentially on the revenue account and declining tax ratios, as the revenue and primary deficits have increased as share of GDP.

The total debt of the states was more or less constant as a share of GDP for around a decade until 1997-98, and so was the ratio of debt to total revenue receipts. Thereafter, however, states' debt as a proportion of GDP has ballooned and the ratio of debt to revenue receipts of states has nearly doubled. This is clearly an unsustainable situation, but as noted earlier, it has not been brought about either by worsening tax generation (which has been broadly stable) or excessive total expenditure, since the primary balance (net of interest payments) has generally been in surplus except for only a few years. Rather, this is due to the combination of falling Central transfers and related inability to repay the high interest on previously contracted debt.

There are various indicators of debt sustainability which are typically estimated, but it is generally accepted that at the very minimum, the growth of nominal GDP must be greater than or at least equal to the rate of growth of interest that has to be paid. As a result, for three critical years since 2000, this condition has not been met, which obviously makes servicing the debt difficult if not impossible. It is this which has then led to further debt accumulation, which obviously makes the trajectory an unsustainable one.

But why have interest rates remained so high if the general perception of declining interest rates is valid? This is where the discriminatory attitude of the Centre towards states in general has had such a negative impact. Under the Constitution, the Centre has the power to determine both the extent and the terms of borrowing by the states from all sources, not only from itself. This power has been used increasingly by the Centre to restrict states from accessing different types of loans and in effect dramatically increasing the cost of borrowing for states.

There are several ways in which this has been done. The Central Government has been charging the state governments higher rates of interest on debt which it issues to them, in fact substantially higher than the Centre has been paying itself. The Centre has also used aggressively its Constitutional powers to limit the ability of the states to borrow from the market and from commercial banks. Therefore, any State Government which has a revenue deficit has to seek special permission from the RBI to borrow from commercial banks, permission which is not necessarily granted.

Finally, State Governments taking on debt provided by multilateral institutions or even loans from bilateral donors have not paid the rate of interest charged by them, but a much higher rate imposed by the Centre, which is the intermediary for such transactions.

From around 1997 onwards, the average rate of interest paid by the Centre on its own debt has fallen significantly, from 9 per cent to around 6.5 per cent, which suggests a much sharper decline at the margin. By contrast, the average interest rate paid by the states has remained broadly stable over this entire period, so marginal rates have not really come down for them.

So the Centre has effectively been reaping usurious benefits from its lending to state governments, and these have amounted in recent periods to around 1 per cent of GDP, or around 20 per cent of the Central fiscal deficit. This is the context in which the Twelfth Finance Commission's (TFC's) discussion of states debt restructuring has to be analysed. The TFC has indeed suggested a formula for reducing the burden of debt of the states, and also for reducing the interest rates payable by them.

However, the positive effects of such a proposal have been drastically undermined by the proposed condition sought to be imposed by the TFC, of forcing states to enact fiscal responsibility legislation and holding to arbitrary targets for fiscal indicators, in order to get the benefits of debt reduction for the states. INAV