With the inflation touching 6.68 per cent, it has become the Government’s top priority to rein in prices. With elections coming near government is really worried on this front. Unfortunately, there aren’t too many policy options available for the Government. With global prices of food and oil showing little sign of cooling, the pressure on the wholesale price index from both primary articles and energy prices is likely to continue. More so as price pressures are likely to intensify over the coming months as inflationary expectations get more firmly entrenched.

It is no consolation that slowing growth and rising prices seems to be a global phenomenon. In these circumstances the Eleventh Five Year Plan targets are unlikely to be achieved, which is a big worry for the government in drawing up the aggregates for the Eleventh Plan. Inflation has become worrisome for our economic management that has become cause for international concern, for the financing institutions, investors and rating agencies.

The overall fiscal picture for the Centre and the states at the start of the Eleventh Plan is indeed, quite alarming if one looks at the revenue deficits of states, most of them trapped in debt and looking for larger Central resource flows, higher borrowings on their own, and write offs of some past debts. In other words, the states are not fiscally healthy to implement the Eleventh plan, even though routinely, the Planning Commission and the individual states agree on a certain outlay for the annual plan on a set of assumptions.

The states have begun to look beyond the existing mechanisms of Finance and Planning Commissions, to overcome their difficulties in meeting essential maintenance and other expenditures. They are seeking debt write-offs, compensation for implementation of the Sixth Pay Commission drain, during the Eleventh Plan period. One feasible option, with details to be worked out, is for states to float new loans at the present lower rates and retire the high cost Central debt.

Most states are aggrieved over the significant fall in their share of Centre’s tax revenues during the Tenth Plan period, a result of the overall decline in receipts for the Government, and there is no formula to compensate states in years of lower revenue realization. After a decade of little progress, many states are now implementing reforms in the power sector, while some are yet to initiate legislative and other measures to restructure the electricity boards. These have become reforms over the long haul with no early payoffs.

Recent expert studies on state’s finances and expenditure management do not hold out any promise of states being able to become solvent on the foreseeable future, unless there are drastic solutions to reduce their debt burden, and states themselves make judicious use of available resources. Not many states have exploited the involvement of the private sector in economic growth by creating an investor-friendly environment. In essence, the Eleventh Plan should not go in the way the Tenth Plan has gone. Though the objectives of the Eleventh Plan are laudable but the resource constraints accompanied with the rising tide of inflation will render economy susceptible to recession.