ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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States without Armour

The states feel the brunt of the downturn, but the centre keeps them out of the loop.

The real concern about the two stimulus packages of the government is not the quantum but the nature of the intervention. The rationale for selective interventions in specific high-end sectors (export, housing, and infrastructure) of the economy seems to be that if these sectors can be pulled out of a downturn, they will act as the drivers of growth and with for-ward and backward linkages the other sectors of the economy will, in turn, also benefit and grow. This is the general nature of fiscal intervention even in the advanced economies. However, we need to understand that although the root cause of the crisis is the global financial meltdown, the strategies to tackle its ill effects on the real sector need to be calibrated to take into consideration the macroeconomic and institutional context in each country. It is all the more true in an economy of India’s size and (economic and geographic) diversity, that spatial needs are factored in and addressed. This is where state governments have a role to play, but these governments have been completely excluded from formulation of policies and there is no coordination between the centre and the states in preparing stimulus packages.

The central government’s justification appears to be that states cannot do much, given their limited revenue capacity, their exclusion from monetary policy and the presence of the hard budget constraint imposed by the state-level fiscal responsibility acts (FRAs). But states have far more expenditure responsibilities vis-à-vis the centre in the provision of various public services. They are also the main providers of the basic services of health, education, water supply, poverty reduction, social security and livelihood security. The states must therefore be provided with adequate resources by the centre through additional resource transfers or by an expansion of their borrowing power or a com-bination of both. This will enable the creation of sufficient fiscal space at the state level to effectively implement various development programmes. It will also enable the state governments to protect those sectors that are and will be adversely affected by the crisis. The states also need to be insulated from the possible downturn in revenues since, unlike the centre, they do not have alternative sources of finance such as monetising the deficit, drawing on external loan sources or resorting to unlimited borrowing at home (all available to the centre).

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