Fiscal Check-Up

The visit of Reserve Bank of India Governor YV Reddy to Nagaland came at a time when much political talk had been going on the way funds for development were being utilized by the present DAN government. Reddy’s comment that the fiscal position of the State was ‘improving’ would have come as a huge relief for the current dispensation under Chief Minister Neiphiu Rio. It would not be surprising if this one off comment from the RBI Governor is used by the DAN to hit back at their detractors who till recently were having a field day badmouthing the fiscal mismanagement of the government. However the DAN will do well not to assume that everything is hunky-dory as far as the fiscal health of the State is concerned.

This is also an opportunity for the government to bring about some of the systemic changes that it has envisaged. The Fiscal Responsibility Act which it had piloted through the Legislature recently should be implemented in a time bound manner. This will hopefully become the cornerstone for a larger exercise in expenditure reform, which Nagaland now urgently requires.

It is well known that a major part of the State resources is being drained out owing to the salary payment of the government employees, and also that the government is being over burdened because of the overstaffing pattern of employees. The three corrective measures announced by the Chief Minister earlier—ban on creation of new posts, inter-departmental transfer of existing manpower, Voluntary Retirement Scheme (VRS)—should be implemented both in letter and spirit rather than remaining merely on paper.

A sound expenditure management policy assumes significance because of the growing revenue deficit in the State, which has brought about a situation where most government borrowings are used for financing current consumption expenditure most notably the non-plan side of the budget. Unless a sincere effort is made to keep expenditure under control, any further increase in fiscal deficit will pose a threat of an impending debt trap.

The problem stems from mismanagement of funds and also the costs incurred by non-development expenditure. To carry out expenditure reform requires greater political will in cutting down on wasteful spending and populist measures. The moot point is whether this can be done during the life span of the present DAN government.

Coming back to the RBI Governor’s visit, his suggestion to the banks to introduce zero-balance account to enable the masses to avail banking facilities should be taken more seriously by those who run the banking system in the State. This will benefit not only the people but also improve the performance of banks as they will be able to mobilize savings especially in rural areas.

On the credit front, if at all the Credit Deposit Ratio has improved as Reddy himself mentioned, there is no reason why the RBI should not ensure availability of more credit to meet requirement of certain sectors such as agriculture, infrastructure and social sectors. While the fear of inflation always looms large if and when more liquidity is made available in the market, the development objective that the RBI is called on to play must also be ensured especially during the lean seasons. Despite the RBI’s role to keep a check on liquidity for the purpose of stabilizing the money market, as a special category State, the RBI should keep its development objective in mind for a resource crunch State like Nagaland.