The real tragedy of Malegaon, as I see it, is not the fact that forty-odd people lost their lives but that many of them could have been saved if they had access to basic medical facilities. They, unfortunately, did not. The town's civic hospital, run by the municipal corporation, does not own a single ambulance and victims had to be brought there in push carts. Essential medicines were hard to come by and the best patients with severe trauma and injury could hope for was a saline drip.

Malegaon is not the boondocks. It is just 300 km from Mumbai, had a thriving powerloom industry, and remains a source of cheap labour for the vast industrial conurbation that surrounds Mumbai. The town had been promised a super-specialty hospital but like most other promises that local politicians made, no one bothered to keep it.

Forget the rural-urban divide - Malegaon represents the chasm that divides our glass and chrome metropolises and our overpopulated, impoverished small towns.

It would be convenient but somewhat inaccurate to attribute Malegaon's problem entirely to the venality of Indian politics and self-serving politicians. The virtual collapse of civic facilities is not peculiar to Malegaon - it is a fate shared by the bulk of India's mofussilia.

It is symptomatic of the severe deterioration of public finances that states across the board have seen over the last few years. Here is some data that should make the point clearer.

Between 1990-91 and 2004-05, the share of developmental expenditure (that includes expenditure heads like health and family welfare) in the total expenditures of states dwindled from 69.5 per cent to 23.8 per cent. As a percentage of GDP, states were spending less than 0.7 per cent of their GDP on health and education in 2004-05. (This includes both revenue and capital expenditures.) The Malegaon tragedy was just a stark, highly visible manifestation of this trend.

What have states been spending on then? Interest payments made by all states together added up to Rs 88,000 crore (Rs 880 billion), or about 2.5 per cent of GDP in 2004-05, the last year for which hard data are available.

Their cumulative fiscal deficit for this year was 4 per cent. Thus, over 60 per cent of the budget gap could be explained by interest expenditure alone. Repayments of market loans and loans from the Centre added another Rs 32,000 crore (Rs 320 billion) to the states' tab. Over the years, debt-service has taken up a growing share of states' spending, pushing them to borrow larger and larger amounts at higher rates.

As the stock of debt increased, so did the burden of interest and principal repayment, triggering an explosive cycle that could lead to bankruptcy. Other non-development expenditure like wages accounted for another large proportion of total spending. Pensions alone accounted for Rs 39,000 crore (Rs 390 billion) in 2004-05. I wouldn't like to go into the details of the central government's finances but suffice it to say that the pattern is similar.

Thus, "development" spending (a convenient catch-all phrase describing all that the government should actually be spending on) has got short shrift and the state has virtually abdicated its role as the key provider of public goods. This has been our version of the "crowding out" effect, our own contribution to economics' glossary. It is not about large public expenditures gnawing away at funds, leaving less behind for private investors. In the Indian case, "crowding out" has meant debt-service and other non-productive expenditures, elbowing out much-needed spending on social services, education and the like.

I'm sure you've heard all this before. My reason for reviving this issue is two-fold. First, things seem to have become better for both the Centre and states' public finances over the last couple of years. Tax administration was improving, as was the tax base. The cyclical rebound in the economy also helped shore up revenues and there were some signs that the government was serious about paring expenditure. Both the Centre and states were gearing to meet the fiscal targets laid down in the Fiscal Responsibility and Budget Management Acts they had signed.

Second, we seem to be on the verge of throwing all this improvement away. The Planning Commission has made a case that the FRBM Act is really not sacrosanct as long as the slippage is due to enhanced spending on capital expenditures or on social sector programmes. I am not entirely sure that this is a tenable argument because it partially absolves the government of the responsibility of paring unproductive expenditures to accommodate more productive spending. A reversal in the path of fiscal correction will also put the economy back on an explosive track of borrowing to service debt.

I am apprehensive of a more adverse turn of events. This is the possibility that the FRBM will be put on hold and fiscal deficits will be allowed to slip simply to accommodate the recommendations of the Sixth Pay Commission. A fiscal deficit larger than targeted will not result in more roads or hospitals - it will mean that bureaucrats at every level will take home a fatter pay cheque.

The Fifth Pay Commission, whose recommendations came into effect in the late nineties, led to almost a 100 per cent increase in the Centre's wage bill and a 74 per cent rise for states. The World Bank claimed this to be the "single largest adverse shock" to India's strained public finances. It took a good five years to recover from this shock and put budget balances back on track.

India's policy makers have a penchant for not learning from past mistakes. I am certain that the new Pay Commission's recommendations will result in a whopping increase in the government's salary bills. The fiscal deficit will bloat. Towns like Malegaon will keep waiting for their super-specialty hospitals.

The author is chief economist, ABN Amro. The views here are personal.