Debt Relief for States

The Twelfth Finance Commission has made significant recommendations on debt relief for states. The quantum of relief is substantial and the conditionalities - passage of a fiscal responsibility legislation and reduction of revenue deficits - are not unreasonable. However, single-minded pursuit of fiscal correction to get the benefit of debt relief can have disastrous implications for states where social and economic infrastructure investments have been insufficient. Some of them will have to impose heavy cuts on development expenditure to adhere to the tight schedule to bring down the revenue deficit to zero by 2008-09. A more rational approach may have been to allow them to follow more realistic adjustment paths over a longer period.