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State must turn on revenue taps

india Updated: Jul 31, 2006 14:56 IST

THE Madhya Pradesh government welcomed the decision to  constitute the Sixth Pay Commission with a rider – the Centre should chip in for meeting the resultant financial burden the state would have to shoulder.  Earlier the state government reportedly objected the move to constitute the 6th Pay Commission. Why is the state government worried?

One, the state’s fiscal situation had worsened since the implementation of the 5th Pay Commission’s recommendations. As per the state’s memorandum to the Eleventh Finance Commission, the additional liability due to increased salaries and dearness allowances (DA) was estimated at nearly Rs 2500 crore between January 1996 and March 2000.

And pension payments reached almost Rs 900 crore in 1999-2000. The funds pressure of the 5th pay panel report has clearly made the state government wary of a fresh revision.

Two, under the MP Rajkoshiya Uttardayitva Evam Budget Prabandhan Adhiniyam 2005, the state government made a commitment to end revenue deficit by March 31, 2009.

In the event of a pay hike, it would be difficult for the state to keep its promise. The state apparently fears that the decision may undo considerably the recent gains in managing finances. In 2004-05 and 2005-06, there has not been a single day when the state has used its overdraft facility!

The 6th pay panel is expected to submit its report in 2008 – an election year in the state, and hence the incumbent BJP government has reasons to be worried.

Nonetheless, rising inflation definitely makes a case for hiking salaries of nearly five lakh state government employees. Moreover in recent times, judicial officers, bank personnel and MLAs in the state have got a raise in their pay packets.

What then is the way out of this fiscal crunch? The state would have to perk its revenues — from tax and non-tax sources. Professional taxes now contribute about Rs 150 crore to the state’s kitty. Though legally everyone engaged in any profession, trade or employment is liable to pay this tax, it is collected only from employees in the organised sector via tax deducted at source. The state must ensure better compliance from self-employed professionals as well.

Besides, the state must persuade the Centre to increase the ceiling on professional tax to Rs 5000 (presently Rs 2500) as recommended by the Planning Commission’s advisory group.

Though the transport sector has been buoyant,  motor vehicle taxes bring in less than Rs 500 crore annually and have been one of the slowest growing taxes in the state. Through measures like computerising inter-state checkposts, the state could tap the huge tax potential of the transport sector.

Though the 73rd and 74th constitutional amendments have devolved considerable powers to rural and urban local bodies, these institutions have shied away from raising their own resources. Leaders and the 3rd State Finance Commission must persuade the local bodies to garner resources through taxes. For example, property tax collections could be improved by urban local bodies while at least 5 percent of farmers could be taxed by panchayats.

Among non-tax sources , there is big scope in two areas. MP ranks first in the country in terms of forest cover; while the benefits of this green cover are spread countrywide, the costs of maintenance of the forests are borne by the state.

There must be some mechanism to compensate the state for the ‘excess’ forests preserved by it over and above the national average. In a judgment on September 22, 2005, the Supreme Court has suggested a Net Present Value (NPV) ranging between Rs 5.80 and Rs 9.20 lakh for every hectare of forest land. MP has about 33036 sq. km. of ‘excess’ forests land over and above the national average.

Assuming a low Rs 5.8 lakh NPV per hectare, the ‘excess’ forests would be equal to Rs 19,1608 crore. Were the state to invest this amount even at 4 per cent interest, it would fetch an annual return of Rs 7664.32 crore! Even the Planning Commission has advocated compensation to states who maintain ‘excess’ green cover. The time has come for the finance minister to pursue this matter and seek compensation from the Centre.

Coal mining is another area. The current regime of coal royalty is based on tonnage; as prices of coal have been increasing, the state has been pushing for royalty based on ad valorem. The finance minister must build and lead a coalition of finance ministers of coal-producing states to press the Centre for enhanced compensation. This could fetch an additional Rs 500 crore per annum.

The writing is on the wall. Unless the state shows fiscal foresight, the financial stress created by the 6th pay panel report may swamp the economy. The writer teaches at NLIU, Bhopal.