Fiscal Federalism Undermined Under The NDA

 Surajit Das

INDIA has a federal system of government. The Constitution of India recognises this, which is why there is such a detailed listing of the powers and responsibilities of the central and state governments. However, economic policy decisions in the post-liberalisation period, particularly decisions regarding revenue sharing between the centre and the states, have not reflected the spirit of federalism. The recent past has witnessed a sharp accentuation of the fiscal crisis of all the Indian states. The tax revenue-GDP ratio has come down as a result of tax concessions given to various businesses and as an outcome many important development and social sector expenditures have been cut and government borrowing has increased at a faster rate. In this backdrop, the effort by the central government to pass on a part of its own burden to the States to acquire some fiscal relief for itself has created crises for the state governments. The BJP-led NDA government came to power for the first time in the year 1998 or in other words since the fiscal year 1998-99 onwards. This government has pursued the neoliberal economic policies dictated by the IMF-World Bank much more vigourously than any of the governments of the past. The fiscal crisis of the state governments were imposed upon them in the period since 1998-99 not just as an automatic fall-out of the centre’s pursuit of neoliberal policies but also through deliberate measures which were aimed at forcing the states to fall in line.

REVENUE DEFICIT 

The combined revenue deficit (i.e. the difference between total revenue expenditure and total revenue receipts of all the states taken together) as a per cent of Gross Domestic Product (GDP) has increased significantly during the period 1997-98 to 2001-02. In 2001-02 the total revenue deficit of all states as a per cent of GDP was nearly four times more than what it was in 1997-98.

                                                                                Table 1

                                                          Revenue Deficit as a % of GDP

     Source: Calculated from Finance Accounts of the states and Economic Surveys for relevant years.

The total outstanding liabilities of all the states taken together as a percentage of GDP at market prices at the end of each fiscal year (i.e. on March 31) has continuously gone up since 1997-98 and reached as high as almost 30 per cent of GDP in the year 2002-03 from about 22 per cent in 1997-98. 

                                                                             Table 2

                               Total Outstanding Liabilities of the States as % of GDP

              Source: Finance Accounts of the States.

INCREASING INTEREST PAYMENTS

The effective interest rate that the states have to pay on their liabilities had also gone up from 8.96 per cent in 1992-93 to between 10.5 – 11 per cent on an average for the years 1998-99 to 2002-03. The argument, which has often been put forward for this increase in the effective interest rate for the states, is that the State governments should play by the rules of the game of the market economy by paying the market determined interest rates on its liabilities. But the fact is that there is no interest rate which is purely market determined. All interest rates in India are administered rates in the sense that they are either determined or influenced by monetary policy, i.e. the decisions on the part of the Reserve Bank of India and the central government. The fact that the states are being made to pay higher interest rates on their liabilities implies that the RBI and the central government want them to do so.  

                                                                         Table 3

                                          Effective Interest Rate of State Governments

                             Source: Calculated from Finance Accounts of the States.

As a result of the hike in the interest rates, the interest payments by the states have increased at a much faster rate during the NDA rule, imposing a heavy burden on their exchequer. This increasing interest payment has in turn contributed to the widening of the revenue deficits of the states.

              Source: Calculated from Finance Accounts of the States.

                   Note: The figure for 2002-2003 is a revised estimate.

The central taxes-GDP ratio, both in terms of gross tax revenue and net tax revenue as a per cent of GDP at market prices had declined from 9.14 per cent and 6.28 per cent in 1997-98 to 8.10 per cent and 5.78 per cent in 2001-02 respectively. The states’ share in the central tax revenue as a per cent of GDP also declined from 2.86 per cent to 2.29 per cent during this period.

                                                                      Table 4

                                   Tax-GDP Ratios of the Central Government

 Source: Union Finance Accounts of relevant years.

DECLINING RESOURCE TRANSFERS

The additional fiscal burden incurred by the central government due to the declining tax-GDP ratio, which is a direct outcome of the tax concessions that the NDA government has been doling out to the rich in successive budgets, has been conveniently shifted to the state governments by cutting down upon transfers to the states. The total transfer to the states from the centre, including total share of the states in central taxes, statutory grants, plan grants and discretionary grants as a per cent of GDP in market prices, has come down during the NDA rule.

                                                                      Table 5

                                 Total Transfer of Resources from centre to states

                                               (% of GDP at market prices)

                               Source: Union Finance Accounts of relevant years.

Within the total transfer from the centre to the states, the share of the states in central taxes and statutory grants come under Finance Commission transfer. The Finance Commission transfers to all States as a per cent of GDP at market prices also show a decline below the 1997-98 level.

                                                    Table 6

                       Finance Commission Transfer to All States

                                  (% of GDP at market prices)

               Source: Union Finance Accounts of relevant years.

Thus the NDA rule has led to the undermining of fiscal federalism in two significant ways. Firstly, by raising the interest rate charged on the outstanding liabilities of the states, the interest payment burden of the states has been increased substantially. Secondly, in order to reduce its own fiscal deficit arising out of the tax concessions it has made to the rich, the centre has passed on its burden to the state governments by reducing the share of transfers to the states. The fiscal crisis faced by the state governments under the NDA rule is more an outcome of the policies of the centre, which has tried to impose neoliberal reforms on the state governments, notwithstanding the fact that many of the state governments are ruled by political parties having serious reservations about such reforms. This is not only violative of the spirit of federalism, but strikes at the root of our democratic set up, wherein the state governments have to bear the brunt of the political attacks against the fiscal crisis and the lack of resources for development, while the role of the central government in precipitating the crisis seldom comes under scrutiny.