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Year of prudent fiscal reforms in Maharashtra

Rahul Virkar and Parikshit Joshi

Faced with a bitter battle with Enron's Dabhol Power Company and an ailing economy, Democratic Front government in Maharashtra embarked on implementing prudent fiscal reforms and tough administrative measures in a bid to resurrect the state's prime position of attracting maximum Foreign Direct Investment.

The state has obtained new investment amounting to more than $4 billion with approximately 500 foreign collaborations being signed for implementing new projects in the state and projects with an estimated FDI of Rs 450 billion were in various stages of implementation across Maharashtra.

After his recent US visit, Chief Minister Vilasrao Deshmukh stated that an additional investment of approximately $40 billion is in the pipeline, which is the largest amount granted to any state in India.

Even as the state made all out efforts to secure maximum FDI, it came under severe criticism from all quarters for its stand on the now bankrupt US energy major Enron's troubled DPC and was also downgraded by rating agencies for the same.

Maintaining that Maharashtra was not in a position to buy DPC's costly power at a phenomenol rate of Rs 7-8 per unit, the chief minister said the controversy will have no bearing on attracating foreign investors to the state.

Maharashtra finance minister Jayant Patil recently stated that the state had saved around Rs 3-4 billion per month since its state electricity board (MSEB) stopped buying power from DPC in May 2001.

"Maharashtra has already given Rs 17 billion to Enron as per the Power Purchase Agreement. The state has also provided Rs 23 billion to MSEB for reduction of its losses," he said.

Under pressure from World Bank to implement power reforms, the government announced trifurcation of MSEB. Patil went to the extent of saying that government's prudent measures have brought down MSEB's yearly losses to Rs 16 billion from Rs 28 billion incurred in the previous fiscal.

The DF government mobilised revenue to the tune of Rs 40 billion through a slew of austerity measures including freezing payment of dearness allowance and bonus to its employees, cutting ministerial staff and telephone bills and identifying surplus staff.

The efforts resulted in the deficit declining to Rs 35 billion in last two years from the previous Rs 90 billion. Maharashtra's borrowings currently stood at Rs 700 billion and as the government has stood guarantor for these, it also has to pay the interest.

The state has also managed to cut down administrative expenses from the earlier 73 per cent to 48 per cent. However, Deshmukh admitted that desired results were not met to revive the economy.

He warned that global recession would further have an adverse impact on the state economy. The state, therefore, introduced mid-term fiscal reforms, which are expected to accelerate the economic growth.

Despite having the highest levy of sales tax, Maharashtra painted a dismal picture, with collections dropping by Rs 6 billion in the first half and may further decrease to Rs 14 billion, a fact attributed to global recession by the state administration.

Yet another controversy revolving around monopoly cotton procurement scheme, which had accumulated losses of approximately Rs 30 billion, cropped up with the government finding it difficult to pay support price of Rs 2,300 per quintal to cotton cultivators from the state.

This year the state expects to procure an estimated 1.42 million quintals of cotton under the scheme, initiated around three decades ago to support cotton growers from Vidarbha, Marathwada and Khandesh regions of the state.

The DF government was giving a price of Rs 2,300 per quintal of cotton since 1999-2000. The loss in that particular year was Rs 7.2 billion followed by Rs 4 billion this year.

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