March 18, 2004

Press Release

The Union Home Minister, L.K. Advani, on the eve of his `Bharat Uday Yatra' stated that during the tenure of the NDA government, he has learnt a lot about the federal structure and federal relations.  For him, however, what their government did in Bihar was `passe'.  And, the extent to which the NDA government worked  in completely destroying the State finance -- the  essential aspect of cooperative federalism -- is a subject Advani would rather try to keep in the background.  Therefore, we from the Communist Party of India (Marxist), thought it necessary to recall  this in the seventh of our series -- "Lies, damned lies and statistics" -- to nail down the falsehood of the `Shining India' campaign.

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Is India Really Shining?

Lies, Damned Lies and Statistics

Fiscal Federalism Undermined under NDA

·         Prime Minister Vajpayee has often claimed that ‘cooperative federalism’ has been the cornerstone of governance under the NDA. The reality, however, has been much removed from this claim. The tenure of the NDA government has witnessed unprecedented fiscal crises faced by almost all the State governments in the country. The fact that so many State governments have simultaneously found themselves in a financial mess during the past six years points to the fact that the crises have more to do with the policies of the Central government than the fiscal profligacy of particular State governments.

·         The fiscal crises faced by the State governments have resulted from the undermining of fiscal federalism under the NDA regime 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. 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 coming under scrutiny.

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

 Tax-GDP (at market prices)

Ratios of the Centre Government

 Source: Union Finance Accounts of relevant years.

• The additional fiscal burden incurred by the Central government due to the declining tax-GDP ratio, which was 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 on 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 percent of GDP in market prices, has come down during the NDA rule.

Total Transfer of Resources from Centre to States

(% of GDP at market prices)

                                      Source: Union Finance Accounts of relevant years.

·          The total outstanding liabilities (debt) of all the States taken together as a percentage of GDP at market prices has continuously gone up since 1997-98 and reached as high as almost 30% of GDP in the year 2002-03 from about 22% in 1997-98.

Total Outstanding Liabilities of All States

(% of GDP at market prices)

                      Source: Finance Accounts of the States.

·          The effective interest rate that the States had to pay on their liabilities had also gone up from 8.96% in 1992-93 to between 10.5 - 11% on an average for the years 1998-99 to 2002-03. The fact that the States were being made to pay higher interest rates on their liabilities implies that the RBI and the Central government wanted them to do so.  

Effective Interest Rate Paid by State Governments

on their Outstanding Liabilities

                Source: Finance Accounts of the States.

·          As a result of the hike in the interest rates, the interest payments by the States has increased at a much faster rate during the NDA rule, imposing a heavy burden on their exchequer.              Source: Finance Accounts of the States                   Note: The figure for 2002-2003 is a revised estimate

·         The combined revenue deficit (i.e. the difference between total revenue expenditure and total revenue receipts of all the States taken together) as a percent 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 percent of GDP was nearly four times more than what it was in 1997-98. This was a direct outcome of the undermining of fiscal federalism by the NDA government.

Revenue Deficit of All States (% of GDP)

Source: Finance Accounts of the States