Chief Ministers,

Administrators of Union Territories,

Ladies and Gentlemen:

I welcome you to the Sixth Meeting of the Inter-State Council.

Over the last couple of years, we have sought to make the Inter-State Council an active forum for free and frank discussions on issues that have a bearing on Centre-State relations. I believe this is the most effective means of evolving a common perception on problems and their solutions.

Moreover, continuous dialogue is bound to strengthen the partnership between the Centre and the States that is the mainstay of our democratic polity.

At the last meeting of the Inter-State Council, we had agreed on several initiatives. One principal area of common interest and concern is mobilising of resources.

The devolution of a higher share to the States from the divisible pool of taxes was discussed in this connection. The Council had agreed on an alternative scheme of devolution that would provide for the allocation of 29 per cent of Central taxes to the States.

To implement this scheme, Government introduced the 89th Constitution Amendment Bill and it has been adopted by Parliament in the recently concluded session. The new scheme of greater devolution of resources to the States will be effective from April 1996.

This marks an important step towards providing the States with more resources so that they are better placed to look after the welfare of the people.

Following last year's meeting of the Inter-State Council, the consultative process between the Centre and the States on financial matters has picked up remarkable speed. The Union Finance Minister held several meetings to work out a feasible programme of reforms aimed at effective and better management of resources. I understand that a lot of ground has been covered towards this end.

Let me now say a few words on the financial problems facing the Centre and the States.

The Centre and the States are going through a period of severe financial stress. Our resources are increasingly proving to be inadequate to meet essential development needs. Both the Centre and the States are, therefore, resorting to excessive borrowing.

The result is that the combined fiscal deficit of the Centre and the States has reached nine per cent of GDP in 1999-2000. This is higher than the level in 1990, when we faced a severe balance of payments crisis.

An unsustainable level of deficit has serious negative effects on the economy. It pre-empts resources which would otherwise be available for investment by the non-government sector. This is reflected in the high cost and limited availability of credit.

High fiscal deficit also leads to rising debt burdens and a continuous growth in interest payments. This, in turn, squeezes outlays for essential social and economic infrastructure.

What is of even greater concern is that these high deficits are not being used to finance investment. They are being increasingly used to finance rising levels of non-Plan expenditure.

This trend must be reversed.

If we do not reverse the trend, we will not be able to achieve the desired GDP growth. We will neither generate employment opportunities nor achieve a reduction in poverty. The Centre and the States have to act in tandem to achieve this objective.

The Union Government, on its part, is making concerted efforts to improve tax buoyancy, prune unproductive expenditure, rationalise the scale and structure of Central subsidies and push ahead with public sector reforms.

The growing subsidy burden is one area we must tackle jointly. The Union Government has taken some difficult decisions to contain subsidies at the Centre. The States would be well advised to do the same.

I would urge the State Governments to act quickly in setting their finances in order. Let me mention some areas where urgent action is necessary:

Reform of the power sector has become critical. The commercial losses of State Electricity Boards now account for over half of the total revenue deficits of the States. So also with the transport and other service sectors. Electricity tariffs must be rationalised and cross-subsidy must be reduced. It is equally important that operational efficiencies in transmission and distribution are significantly improved in the interest of the consumer.

User charges on utilities and services have to be rationalised. Our existing irrigation systems are being allowed to deteriorate for want of funds. More often than not, user charges cover only a fraction of operational costs.

A more rational policy needs to be evolved in respect of State PSUs. While viable undertakings need to be strengthened, those that are loss-making and cannot be rehabilitated need a realistic approach.

State Governments have seen a much faster growth in Government employment than the Centre. I can understand the compulsion. But this policy is unsustainable. The difficult steps taken by some State Governments to curb this growth deserve encouragement. We need to evolve a consensus on right-sizing of Government.

The improved financial returns would enable better funding of much-needed programmes for healthcare, education and social infrastructure.

Many States feel that the solution lies in greater provision of funds by the Centre. However, I would urge you to realise that providing additional Central funds cannot solve the problem. The financial position of the Centre is itself strained.

Therefore, we need to act in concert and with determination.

Next to our commitment to better fiscal management, is our resolve to bring about wholesome decentralisation right up to the grassroots level. It is my firm belief that development, both economic and social, is best served when decentralisation and devolution touch, and thus change, the lives of people living in the smallest village.

Therefore, it is not sufficient for this forum to deliberate only on the devolution of more financial and administrative powers to the States. We must look at ways and means of taking devolution to the basic tier of our democratic structure -- panchayati raj institutions and municipal bodies.

The Constitutional scheme, as incorporated through the 73rd and 74th amendments, is already in place. Our task now is to ensure that the process of true decentralisation up to the grassroots level acquires substance and strength.

I understand that many States have already held panchayat elections and others are in the process of holding them. This is a healthy development that further strengthens our democracy and adds dynamism to our polity.

But while this in itself is commendable, it is only the first step.

The panchayati raj institutions have to be empowered through suitable devolution of financial powers and functions. I am told that most of the State Finance Commissions have submitted their reports for devolution of resources to the panchayats. It is now up to the State Governments to implement the recommendations of their respective Finance Commissions.

We must constantly bear in mind that panchayati raj institutions are the most appropriate means of delivering development programmes at the grassroots level, thus effectively addressing economic backwardness and poverty. While aggregate figures of growth may appear robust, they will acquire meaning only when the masses get access to basic needs.

We have included an important issue for discussion today. It pertains to the removal of restrictions on the movement of essential commodities. I look forward to all State Governments cooperating in removing restrictions on the movement of foodgrains. This will help ameliorate the sufferings of our people who are in the grip of a severe drought in some regions of the country.

The last point I wish to touch upon concerns internal security. People in many States are facing terrorist and separatist violence in one form or another. This merits full discussion. Hence, I have called a meeting of Chief Ministers on August 7 to look into internal security related issues and how to tackle them.

In a democracy as big and diverse as ours, debate, deliberation and discussion help evolve policy that relates to the ground reality. More importantly, they enable the effective implementation of such policies.

The Inter-State Council is an inter-governmental forum that can be used for evolving policy as well as ensuring its implementation. I, therefore, urge the States to increasingly use this forum as an effective instrument to strengthen our democracy, our society and our polity.

The texts of the speeches of Chief Ministers have been circulated. If you agree, we can straightaway start discussing the items on today's agenda. This will enable optimum use of time.

I look forward to fruitful discussions at this meting of the Inter-State Council and thank you for sparing your valuable time.

Jai Hind!