The Planning Commission is willing to consider a lumpsum grant assistance to states undertaking a time-bound fiscal reform programme. The assistance -- essentially, bridge financing -- would, however, be linked to the imposition of user charges in sectors such as power and water and reforms in areas that include sales tax administration and urban property taxation.

"There is a case to provide states with assistance by converting loans to grants, but in concurrence with concrete steps on fiscal reforms," Montek Singh Ahluwalia, deputy chairman, Planning Commission, told Business Standard.

While he said the Planning Commission was constrained to help out reforming states, he maintained "there cannot be a free lunch".

The debt levels of a majority of states was unsustainable and they needed assistance to overcome their deficit problem. The Twelfth Finance Commission, which is chalking out a debt restructuring plan, is expected to submit its report by December. The Planning Commission would then address the issue in the mid-term appraisal of the Tenth Five Year Plan.

"The real role of grants is to lubricate a transition," Ahluwalia said.

"There are a number of areas where reforms are urgently required in order to improve the fiscal situation of states," said Ahluwalia.

For instance, in the power sector, providing cheap electricity results in the overdrawing of groundwater, and with dipping water tables, the large farmers with powerful pumps benefit, while the productivity of smaller farmers suffers.

The modernisation and upgradation of the sales tax administration was another area, which could make a big difference to state finances.

"Take for example Haryana, which has seen sales tax collections go up by 32 per cent after implementation of the value added tax regime in April 2003," Ahluwalia pointed out.

Similarly, rational methods of enumerating property could double the penetration in urban areas and significantly raise the resources garnered by the states from property taxation.

Currently, states finance expenditure through debt and do not have a reasonable user charge regime. In such a situation, even if investment is carried out in productive areas, it would become difficult to service debt. The increasing interest burden is squeezing expenditure in productive areas, Ahluwalia said.

Of Plan funds provided to states, 70 per cent is in the form of loans and 30 per cent grants. The states have time and again made a case for increasing the grant component and even the Ninth Five Year Plan (1997-2002) advocated changing the composition in favour of 50 per cent grants. Ahluwalia said the Planning Commission was willing to consider this, that is, if the states submit a credible reform plan.