Case for 'Financial Emergency'?

Source: Economic and Political Weekly, Vol. 38, No. 17 (Apr. 26 - May 2, 2003), pp. 1616-1617
Published by: Economic and Political Weekly
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associations too bask in the reflected glory of the victorious

athletes and encourage them to win - at any cost. Only when
the athlete comes to be regarded as a commodity to be primed
and prepared to yield the best results, without regard to the
consequences for the athletes, does this situation arise.
While certainly there are structural issues - such as the need
to establish good testing labs, evolving a uniform code of conduct
and practice for athletes and trainers,ensuring support for ethical
and safe competition - that need to be urgently resolved, essentially it is the institution of sport that needs to be reinvented,
modernised and integrated into the development ethos. The
competitive ethos and profit orientation of modern sport can be
stood on its head in a mannerof speaking and drawn to modernise
sport so that its social dimension is not subverted. This is exactly
what has happened in cricket and despite its critics there can be
no claim that the development of the game has suffered or the
cricketerhas been ill looked after. Indeed it is because of a strong
institution that the recent match-fixing scandal could be dealt
with in a reasonably effective manner. [Z3

STATE FINANCES

Case

for

'Financial

Emergency'?
venthemostardentadvocateof stateautonomyin afederation
would be hardput to protestwere the centreto invoke the
'financialemergency'provisionsof the Constitutionto chastise
the governmentof Biharfor failureto meetone of its mostbasic
financialobligations,viz, paying salariesto its employees on
time.Longdefunctstate-ownedundertakingsin the state,nearly
50 in number,have on theirrolls some 88,000 employeeswho
reportedlyhave not received their salariesfor years. Over 1.5
lakhpersonsemployedin schools andcolleges aresufferingthe
same fate. Over a thousandof these have died of starvationor
disease. Many have committedsuicide. It has taken a public
interestpetitionto the SupremeCourtto force seriousattention
to theirplightandthattoo afterthesonof anemployeeimmolated
himselffollowingthedeathof his ailingmotherandsisterbecause
of theinabilityof hisfatherto sustainthemandtheghastlytragedy
was reportedin a nationaldaily.
The SupremeCourt,it appears,wants to hear the Attorney
Generalof Indiaon the Bihargovernment'splea thatthe onus
lies with the centrebecausethe state has no money to pay the
employees.Eminentlawyerswill now battleit out to establish
whose responsibilityit is to pay salariesto the employeesof the
state'sPSUs. 'Howcanthestategovernmentbe heldaccountable
whentheydonothappen
forpayingemployeesof itsundertakings
to be on the government'srolls?',it will no doubtbe asked.Are
not the undertakingsseparatelegal entities in which the state
governmentis merelyan equity-holderwith limitedliability?Is
not the centre that holds the purse-stringsof the nation also
responsiblefor the state's penury?And what aboutthe courts
whereliquidationproceedingsfor theundertakings
arelanguishing for years?Shouldtheyalso not sharepartof theblame?Now
thatthe SupremeCourtis seized of the matter,hopefullysome
directionswill comeoratleastsomeinterimreliefwill be ordered
to be given. But the matterraises some fundamentalquestions.
Is thereno remedyif a state goes broke and stops paying its
employeesor those of the undertakingsowned by it for years
1616

or fails to honour its debt obligations? Has the centre no obligation

or power to intervene in such a situation?
While in a federal polity the primaryresponsibility of providing
many of the public services lies with the states and local governments, the centre too has to see that the basic services are
made available to all citizens across the country at a reasonable
level. This constitutes the rationale for federal equalisation grants
to provinces under the Canadian constitution, for example.
Unfortunately, providing subsistence to all does not ordinarily
come under the definition of public services in all countries,
though assuring social security to citizens is recognised as a task
of a state even in avowedly capitalist countries. In India starvation
deaths anywhere raise a national outcry, thanks to the country's
vigilant and free media, and induce the courts to intervene. But
is there no way the centre can force a state to act when it fails
to meet its committed liabilities or pay even for subsistence of
employees for whom it is ultimately responsible?
India's Constitution-makers had foreseen that such eventualities might arise and had provided for a 'financial emergency'
to be proclaimed "if the president is satisfied that a situation has
arisen whereby the financial stability or credit of India or any
part of the territory thereof is threatened" (Article 360). Under
a financial emergency the central government can direct any state
"to observe such canons of financial propriety as may be specified" and give "such other directions as the president may deem
necessary".
A country's credit clearly is threatened when the government
at any level fails to pay its creditors. That is why subnational
debt and deficits have come in for so much attention in recent
years. But credit gets threatened also when a state fails to pay
its employees or those for whom it has a vicarious responsibility
regularly. What are the financial emergency provisions of the
Constitution for if they are not to be invoked in such situations?
While the acute fiscal distress of the states has led to many
initiatives on the part of the centre to induce them to follow the
path of fiscal rectitude, the attempt mainly has been to provide
incentives for implementing fiscal reformby attachingconditions
to centraltransfers,raising questions about theirefficacy andeven
legitimacy. There has however been no attempt to punish a state
by promulgating a financial emergency when its credit is clearly
threatened even though the Constitution provides for it. In any
case there is little evidence to show that the 'incentives' have
made much difference to the behaviour of profligate states. In
the last analysis only a hard budget constraint and the threat of
financial emergency can keep the states on their toes.
The problem is that the emergency provisions of the Constitution have been so much misused that the courts had to intervene
and the conditions now requiredfor sustaining an emergency are
not easy to meet. That apart, when a state is ruled by a party
not aligned to the centre an emergency is bound to evoke suspicions of mala fide. It is however possible to insulate a financial
emergency proclamation from politics by laying down certain
operationally simple rules to indicate when such an emergency
will be triggered.
One way could be to institute a 'fiscal watch programme' as
is currently in vogue in the state of Ohio in the US whereby a
local government can be placed under a financial emergency
defined as occurring when, among other things, there is a more
than 30 days' default on a debt obligation, or a failure to pay
employees within 30 days or an overdue liability exceeding onesixth of the preceding year's revenue. To ensure that the corrective actions are not coloured by narrow party politics and the
bureaucrats at the centre do not lord it over the states and the
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April 26, 2003

system operates transparently, the administration of a financial

emergency should be entrusted to a constitutional authority like
the Comptroller and Auditor General. The problem is that even
with such safeguards, given the composition of parliament,
emergency proclamations will be judged not on merit but on
purely party calculations. Moreover, not all the blame for the
financial mess in which the states find themselves can be laid
at their doors. Their kitty has shrunk partly because of sluggish
growth of the centre's revenue. Also the fiscal reform programme
which the states are now requiredto implement undertheir MOUs
with the centre envisage "restructuringof public sector enterprises" which means their closure or privatisation and all such
restructuring ultimately results in retrenchment for which the
state in question may disclaim any responsibility. A viable VRS
scheme or social security system must be put in place before a
state is required to embark on such programmes.
Nothing however excuses a statefor the callousness thatbecomes
palpable when employees whether on its rolls or on the rolls of
its PSUs die in thousands on account of non-payment of salaries
or any compensation for being thrown out of employment. It is
time serious consideration was given to how the financial
emergency provisions of the Constitution could be used to see
that no state can avoid honouring its most basic obligations
with impunity. 1Z1

TEXTILE INDUSTRY

Future

at

Stake

Intense lobbying is on to tear up the textile package presented

in this year's union budget, complete with agitations, predictions of doom and bust in case the new fiscal measures are not
withdrawnand political grandstandingby members of parliament
who push sectional agendas without any thought to the common
good. The government must stand up to this pressure and implement the package of fiscal measures announced for the benefit
of the textile industry. This is imperative to enable the textile
industryto survive the tidal wave of competition that will sweep
through the sector, once the multi-fibre agreement comes to an
end at the end of 2004 and country quotas become extinct.
Finance minister Jaswant Singh announced what he called a
package of incentives for the textile sector as part of his budget
proposals.Essentially, the proposals sought to complete the chain
of central value added tax by removing the present system of
deemedCenvatcreditandreplacing it with normalCenvatwhereby
the powerloom sector will also have to pay tax. In addition, the
proposals seek to move towards a uniform duty structure for
different kinds of fibres and blends, natural and man-made. The
government also proposes to enhance availability of financing
for the sector to upgrade technology and quality; import duties
on machinery have been lowered for the same purpose.
This textile package is based on the reporton the sector prepared
by a group headed by Planning Commission member N K Singh.
The only points of departure from the committee's recommendations relate to slower pace of unification of duties, probably
on revenue grounds. The essential finding of the committee, as
well as that of other inquiries into what ails India's textile
industry, is thatthe fiscal structureis skewed against the modem,
integrated mills so that India is left without domestic production
of quality textiles needed by the largest and most lucrative
segments of the garmentstrade. In the process of trying to protect
Economic and Political Weekly

whatshouldbe marginalsegmentsof an expandingindustryin

which Indiahas traditionallyhad competitiveadvantage,fiscal
policy has been killing the industryitself. The hank yam obligationon spinningmills, the dutyexemptionon yam purportedlygoingtothehandloomsegment,theexemptionof powerlooms
from duty and deemedcredit given to processorsfor duty not
actuallypaidby powerlooms,aresomeexamplesof thedistorted
fiscal policy in textiles.
In the time of licence raj, when the big mill-ownershad
successfully lobbied the governmentagainst grantingfurther
expansionof weavingcapacity,the smallermill-ownershadset
up looms in scatteredunits.These are technologicallyobsolete,
incapableof producinglarge quantitiesof uniformqualityand
offer miserablewages to the workers.It is estimatedthatwhile
the numberof powerloomsin the countryis around16.5 lakh,
the numberof loom-owners,or masterweavers, is less than
2 lakh.Buttheseindividualstendto be influentialin localpolitics
andarenow mobilisingopinionin the nameof 20 lakhworkers
of thepowerloomsector,againstextensionof Cenvatto thesector.
The powerloom-ownershave been evadingexcise dutieson the
fabricsthey weave, but that is not the only duty evasion they
havegainedfrom.Theyamtheypurchasedalsousedtobe without
duty.Inthenameof yar forthehandloomsector,a largequantity
of yar used to be exempt from duty and that used to find its
way to the powerlooms.The 2001-02 budgethad pluggedthat
loophole to a large extent.
The cost advantageof evadingdutytwice in the value added
chainhasmadepowerloomsoverwhelmtheorganisedmillindustry
which has to bear duty on both yar and fabric.Unprofitable
mills do not attractfinancingand so have failed to modernise
as well. Thus while the rest of the world has moved on to
shuttlelesslooms andothermodernways of weavingfabric,the
Indianindustrystagnatedin terms of technology.One consequence has been its inabilityto producethe vast quantitiesof
standardisedmaterialrequiredby modernmass marketingin
garments.Thus India has a very feeble presence in the most
profitableandlargestsegmentof garments- formalsuits.Itwould
not be too muchof an exaggerationto say thatthe fate of India's
textileindustryhangsin the balance.The multi-fibreagreement
thathandedout countrywisequotasfor exportsof textiles will
cease to be with effect from January1, 2005. Thereafter,it is
competitivenessand quality that will determinehow much a
countryexportsin textiles, not any quota.
Unless the fiscal distortionsthathave stuntedthe growthand
developmentof the textile industryare removed,Indiawill see
a declinein its exportperformance.Sourcingwill shift to other
countriesthathaveintegratedcapabilityin textiles- fromgrowing cottonto designingandmanufacturing
garments.Currently,
China and Pakistanare the two countriesthat have the most
potentialto witnessa quantumjumpin exportsin the post-quota
world.Indiawould lose its currentmarketshareto these competitorsif it fails to moderniseits textile industryand prepare
for flexible, fast, large-scalemanufacturingin this segment.
The textilepackageworkedout by the PlanningCommission
groupandimplementedwith only some minordeviationsin the
budgetis what the industryneeds to find its feet in the postMFA scenario.Giving in to the agitatingpowerloomoperators
and breakingthe Cenvat chain would mean condemningthe
entiretextilesectorto a slow death.The governmentmuststand
firm and resist the temptationto buy short-termpeace with an
agitatingminoritysimply becausea much largermajoritywho
standto gain fromthe budgetproposalare not vocal enoughin
their support.Bi

April 26, 2003

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