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The Quality of Public Debt in Manipur

The issue of public debt has become important as our revenue receipts are consistently falling short of our requirements. Because of the huge opening balance of (-) Rs 383 crores we are again facing another prolonged phase of financial crisis. Activities associated with the government are no longer as attractive as they used to be.

Government employees may again find their salaries being considered as interest free loans by the state government. Since there is practically no scope for wiping out the revenue deficit overnight, borrowing remains the only viable short-term measures to alleviate this crisis. This necessitates a proper analysis of public debt of Manipur.

The state governments can borrow under Article 293 of the Constitution upon the security of their consolidated funds. The state legislature may prescribe a limit within which a state government can borrow or can give guarantee. A state government cannot contract a foreign loan. If a state is indebted to the Central government or if a loan guaranteed by the state government is outstanding, then the state government can raise further loans subject to the approval of the Central government.

Since every state is indebted to the Central government, no state government can borrow without the approval of the Central government. Debt obligations of the state government have three important categories, viz. Internal debt, loans and advances from the Central government and provident funds.

The physical growth of an economy should be compatible with the financial growth. Public debt constitutes the base of the credit system. It is a powerful tool in the credit and monetary regulation of the economy. Government obligations in the form of public debt have no risk of default. If public borrowings are used for the development of capital goods sector or for the development of social overheads the importance of public debt becomes obvious in a backward state.

However, unlike tax financing, debt financing of expenditure adds to the future budgetary commitments and becomes a drain on the budget. It amounts to making the future generations contribute to the present utilization of resources. The burden may be minimized by maximizing the proportion of public debt used for capital information, which leads to increased productivity. Thus public debt incurred mainly for capital formation will not be as embarrassing as public debt incurred for consumption.

Manipur’s public debt rose from Rs 8.2 crores in 1972-73 to Rs 1274.2 crores in 1999-2000. In the budget estimate for 2001-2002 it is expected to fall to Rs 982.8 crores. Between 1972-73 and 1999-2000 revenue deficit appeared only in 1972-73, 1973-74 and 1999-2000. There was surplus in the revenue account in most of the financial years. However, it must be emphasized here that our own resources raised through tax and non-tax revenue always constituted a minuscule portion of revenue receipts.

In 1972-73 our own resources constituted only 17.6 per cent of revenue receipts, the rest coming from the Center in the form of grants-in-aid and state’s share of the Union’s excise duties. In the budget estimate for 2001-2002, the proportion declined to a mere 8.6 per cent. Our dependence on the Center for financing our consumption expenditure has been gradually rising.

Currently we get non-plan schemes, Central plan schemes, Centrally sponsored schemes, and grants for special plan schemes from the Central government. Besides, we also get a proportion of Union excise duties. Bulk of the grants-in-aids is grants for state plan schemes.

Public debt consists of internal debt of the state government, loans and advances from the Central government for non-plan and plan purposes. Internal debt comprises of market loans, loans from LIC, GIC, SBI, NABARD, NCDC, REC and ways and means advances from the RBI.

During 1972-73 and 1999-2000, the composition of public debt was only 13.5 per cent. However, by 1999-2000 the share has risen to 92.7 per cent. The share as per the 2001-02-budget estimate is 89 per cent. The share of ways and means advances from RBI in total internal debt of the state in 1999-2000 was 95.7 per cent. These are borrowings of a purely temporary nature to cover the deficit in the minimum cash balance required to be maintained with the bank.

Such advances are repayable not later than three months from the date of making that advance. An amount drawn by a state from the RBI in excess of WMA is an overdraft. Since November 1993 no state is allowed to have overdraft for more than ten continuous working days. Frequent use of overdraft facility and WMA by the states is becoming common.

In 1972-73 we spent Rs 1.43 crores as interest on debt and other obligations. It constituted a mere 7.4 per cent of revenue expenditure. In 1999-2000 we spent Rs 132 crores in interest payment and servicing of debt, which constituted 10 percent of revenue expenditure. In the budget estimate for 2001-02, it is expected to rise to 12.7 per cent. It is committed non-developmental expenditure and has compromised significantly the state government’s ability to invest in productive activities. As of now our borrowings are not related to our credit worthiness.

The volume of market borrowing is controlled by the Central government. The debt service payments both to the Central government and other institutional creditors are incorporated in our budgets and are not related to the success or otherwise of the projects in which borrowed resources have been invested.

Flow of resources from the Center has been persistently stagnating due to the ongoing adjustment process. Nor are we in a position to tap the capital market as per our requirements. Though this slows down our gradual slide to a debt trap situation, the crunch of the shortage has mainly occurred in the form of decline in capital expenditure. This has compromised the productive capacity of future generations.

Another aspect of this expenditure head is the fact that the current government can do little to reduce it in the short run. Whatever we do today will become obvious in the long run. However, ensuring efficiency of the investments made out of borrowed funds will lighten the burden.

*The article is written by E Bijoykumar Singh

*The writer is an Associate Professor in the Department of Economics, Manipur University

(Courtesy: The Imphal Free Press)

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