Indian Economy, 5th edition (89 page)
Read Indian Economy, 5th edition Online
Authors: Ramesh Singh
SPECIAL CATEGORY STATES
The term Special Category States (SCS) has been in
news
for the past many years, specially since a new state of Jharkhand was carved out of the then Bihar – the new Bihar has been demanding such a status from the Centre – the present government in Bihar has always put this demand – before the General Elections of 2014, the government there put a condition on which it may think joining an Alliance forming the Central Government in the post-2014 times. Recently, the matter has been included by the GoI in the
Union Budget 2013-14
and the government has conveyed that it is ‘considering such a status for Bihar’ – whatever be the complusions/realities of the contemporary real politik, hereby, let us try to understanding the idea of the ESCS.
The Special Category States (SCS) have some common characteristics like international boundary, hilly landscape, geographic and socio-economic backwardness with low capability to generate adequate income from available resources etc. Presently, 11 states come under this category- seven States of North-Eastern region, Sikkim, Jammu & Kashmir, Himachal Pradesh and Uttarakhand. Other states are referred as
General Category States (GCS).
They are ‘special’ in the sense that they have special socio-economic, geographical problems, high cost of production with less availability of useful resources and hence low economic base for livelihood activities.
Fiscal Position of the SCS:
The SCS are highly dependent on central grants from the Union Government for meeting their financial requirements. These states show a revenue surplus position because any ‘expenditure that they make on creating assets out of grants from the Centre is not treated as revenue expenditure’. This is
contrary
to the existing accounting standards which treats all expenditure from grants as revenue expenditure.
Manipur, Nagaland, Sikkim and Uttarakhand have a fiscal deficit which is higher than 3 per cent but less than 6 per cent ) of their GSDP and the
13th Finance Commission
has indicated that they have to make efforts to reduce the fiscal deficit to 3 per cent by
2013-14
. Jammu and Kashmir and Mizoram have higher fiscal deficits and require concerted efforts at reducing their debt stock to achieve targets set by the 13th Finance Commission. The other states Arunachal, Meghalaya, Assam, Tripura and Himachal pradesh have a fiscal deficit which is less than 3 per cent of GSDP and therefore need to maintain their position to achieve the targets set out by the 13th Finance Commission.
Although the 12th Finance Commission recommended that all states (including SCS) should be permitted to borrow from the open market at market rates, the special dispensation given to special category states continues for external loans. In the case of the externally aided projects to SCS, the Union Government treats 90 per cent of the amount borrowed as a grant and only the remaining 10 per cent is a loan. (For the general category states, externally aided projects are funded on a back-to-back basis).
More Central Assistance for SCS:
Human Development Index (HDI) is considered as a better indicator of overall development of a state. Central grants are required to ensure/maintain better education and health standards in these states as they may not be able to generate own resources for this purpose due to their economic vulnerability. SCS require more central assistance as some of the SCS’s Debt-GSDP ratio is higher than General Category States. High Debt GSDP ratio leads to fiscal vulnerability and poor sustainability of debt related obligations.
The
13th Finance Commission
has recommended a ‘Performance Grant’ of Rs. 1,500 crore to three SCS, namely Assam, Sikkim and Uttarakhand in recognition of the efforts made by these states to reduce their ‘Non-Plan Revenue Deficit’
[Non Plan Revenue deficit = Non Plan Revenue receipts - Non Plan Revenue expenditure].
Planning Commission
also publishes data regarding SCS central assistance as per ‘Gadgil Formula’, plan expenditure, fiscal status etc. The North Eastern States out of SCS have been provided special incentives by the Ministry of Development of North Eastern Region (DONER). Moreover, Ministry of Commerce and Industry had been formulated a separate policy named as
North East Industrial and Investment Promotion Policy (NEIIPP), 2007
[earlier known as the North East Industrial Policy (NEIP), 1997] providing incentives for all industrial units to expand industrialisation and development activities in North Eastern states. The Special Incentives packages for Industrial Development of the states like J&K, Himachal Pradesh and Uttarakhand are also implemented by the Ministry of Commerce and Industry.
Government Debt
Due to the global financial crisis, fiscals deicit of the GoI has been expanding which added to its overall debt burden. Prolonged fiscal deficits lead to accumulation of debt beyond levels sustainable for an economy and can result in higher real and nominal interest rates, slower growth in capital formation, and potentially lower rate of output growth. The outstanding liabilities of the central government were placed at Rs. 44,68,714 crore, equivalent of
49.8
per cent of GDP at end-March 2012. As a proportion of GDP, outstanding liabilities (adjusted) of the centre peaked at
67.0
per cent in 2002-03 and have fallen subsequently notwithstanding the rise in fiscal deficit in the post-crisis years. This is on account of the fact that growth in incremental assumption of liabilities has been lower than that of nominal GDP and the debt to GDP ratio dynamics is aided by the ‘differential between nominal GDP growth and nominal interest rates’, which makes it possible to achieve a greater reduction through a given primary balance.
The total liabilities for the GoI include debt and liabilities accounted for in the Consolidated Fund of India
(technically defined as ‘public debt’)
as well as liabilities accounted for in the public account. Public debt constitutes 76.3 per cent of total liabilities at the end of March 2012. It is further classified into internal and external debt. Internal debt, constituting
90.9
per cent of public debt, largely consists of fixed tenor, fixed coupon dated
securities
(72.1 per cent) and
treasury bills
(10.2 per cent).
Over time, there is a compositional shift toward
marketable debt
, while the public account liabilities have seen a commensurate decline. The share of marketable debt to total internal liabilities, which was about 30 per cent in the beginning of the 1990s, increased to 40 per cent in the beginning of the 2000s and is budgeted to increase to 67.5 per cent by
end-March 2013
. The share of public account liabilities on the other hand is estimated to decline to 22.8 per cent in 2012-13 (BE) from about 30 per cent in 2001-02 and about 46 per cent in the beginning of the 1990s.
More dependence on
domestic debt
insulates the debt portfolio from volatility in international capital markets. It also minimizes currency risk. Apart from this, internal debt of the features which provide some comfort are –
(i)
Weighted average
maturity
of outstanding government securities at 9.8 years is high compared to international standards.
(ii)
Most of the public debt in India is at fixed interest rates. Of the total outstanding dated securities, only
1.8
per cent
was on floating rate. Thus, interest payments are largely insulated from interest rate volatility, which provides stability to the Budget.
(iii)
The average cost of the debt (interest payments/debt ratio) and interest payments as a percentage of revenue receipts are on a secular decline, though some rise was seen in the past two years. ‘Ratio of interest payments to revenue receipts’ has declined to around
36
per cent
in 2011-12 from about 50 per cent
in the beginning of the 2000s.
Consolidated General Government
The fiscal deficit of the Centre in 2012-13 is estimated to be at
5.2
per cent (RE) while for 2013-14 the target is of
4.8
per cent (BE) as per the
Union Budegt 2013-14
. Combined fiscal deficit of states has exhibited a modest ‘deterioration’ to 2.3 per cent of GDP in 2011-12 and is estimated to be around
2.0
per cent for 2012-13.
The fiscal outcome in terms of ‘Consolidated General Government’ (Centre and states combined, i.e., ‘the fiscal deficit of the Indian economy’) was at
8.1
per cent in 2011-12 (RE) as against 6.9 per cent in 2010-11. In 2012-13 (BE), it is budgeted to come down to
7.2
per cent of GDP. While there is a likely
slippage of 0.2
percentage point in terms of the Centre’s target, the overperformance in states is expected to help in achieving the budgeted levels in the overall fiscal outcome in 2012-13.
Prospects for the Future
The
Mid-Year Economic Analysis 2012-13
sought to allay concerns about the fiscal outcome for 2012-13 through allusion to the measures taken and indicated that the fiscal deficit for the year would be contained at
5.3
per cent of GDP. The outcome in April-December 2012 in terms of fiscal deficit broadly indicates that this is likely to happen notwithstanding the significant shortfall in revenue. The overall shortfall in
non-debt receipts
could be contained with ongoing greater efforts at mobilisation and
reforms
already in place. The longer-term outlook has already been outlined in terms of the fiscal consolidation roadmap leading to a fiscal deficit of
3.0
per cent of GDP in
2016-17
( shown by the Union Budget 2013-14 also). Addressing the key fiscal risk of
petroleum subsidies
is critical in better fiscal marksmanship. With the recent ‘reforms in diesel prices’ and efforts at expenditure reprioritisation, the medium-term fiscal consolidation plan is credible and could be expected to yield macroeconomic dividends in terms of higher growth and price stability.
1.
L. N. Rangarajan (ed.),
The Arthashastra,
Penguin Books, N. Delhi, 1992.
2.
The size of government expenditure for the developed economies stood at almost 10 per cent of their GDPs at the begining of the 20th century—which could rise to 18 per cent only at the outbreak of the
s
econd
w
orld
w
ar—went for a steep rise by 1980 to 40 per cent. The government expenditure was barely 9 percent of the GDP in India at the time of Independence, nearly doubled in 1970s and reach 75 per cent in the 1980s—when questions were raised about their sustainability as revenue receipts failed to grow adequately resulting in rising budgetary deficits (see Amaresh Bagchi (ed.),
Readings in Public Finance,
Oxford University Press, N. Delhi, 2005, pp. 1–4).
3.
It should be noted here that the world which had the form of the state economy (i.e., the Socialist countries at this time, majority of the economic activities were under government control. As the communist form of the state economy emerged by the late 1940s (i.e., Peoples Republic of China, 1949), it had 100 per cent state control over the economic activities.
4.
Collins Dictionary of Economics,
op. cit., &
Oxford Dictionary of Business
, op. cit.
5.
Based on the Budgetary documents of the Ministry of Finance, Government of India, N. Delhi.
6.
Union Budget 1987–88,
MoF, GoI, N. Delhi.
7.
Review of the Working of the Monetary System,
headed by Sukhomoy Chaktravarthy, RBI, GoI, N. Delhi, 1985.
8.
Raja J. Chelliah,
‘The Meaning and Significance of the Fiscal Deficit’
in Amaresh Baghi (ed.),
Readings in Public Finance,
op. cit., pp. 387–88. Also see
Union Budget 1997–98,
MoF, GoI, N. Delhi.
9.
Raja J. Chelliah, op. cit., pp. 381 & 387. Also see
Union Budget 1997–98,
MoF, GoI, N. Delhi.
10.
Union Budget 1997–98,
op.cit.
11.
Raja J. Chelliah, op. cit., P. 389. Also see
Union Budget 1997–98,
op.cit.
12.
In the US economy if tax revenue falls short of government expenditures, the government has a
fiscal deficit,
and it means that the government needs to borrow in the capital market to cover the difference. Opposite to it, if the government runs a
fiscal surplus
(i.e. its tax revenues exceed its expenditure) then the government, like the household sector, will be a net saver and will represent a source of saving for the economy (see
s
tiglitz and Walsh,
Economics,
op.cit., p. 549)
13.
J. K. Galbraith,
A History of Economics,
Penguin Books, London, 1987, p. 226. (
The whole Chapter XVII on J.M. Keynes pp. 221–36 is interesting to refer on the topic
.)
14.
For a detailed discussion on the topic one may refer to Joseph. E. Stiglitz,
Economics of the Public Sector,
W.W. Norton, 3
rd
Ed., New York, 2000.
15.
It should be noted here that although the governments had run deficits (i.e., budget deficit) even before the Keynesian idea of the deficit, the pre-Keynesian thinking was that in peacetime the budget should generally be
balanced
(i.e., neither deficit nor surplus), or even in surplus so that the government debt created by wartime deficits could be paid off. For further reference on the topic and its constraints, Stanley Fischer and William Easterly,
Economics of the Government Budget Constraints,
World Bank Research Observer, Vol. 5, No. 2, July 1990, pp. 127–42 see (also reproduced in Amaresh Bagchi (ed.),
Readings in Public Finance,
op. cit., pp. 301–19).
16.
Ibid. (
Amaresh Bagchi
ed. op. cit., pp. 305–10).
17.
Ibid.
18.
Ibid.
19.
L.N. Rangarajan, op. cit., pp. 259–62.
20.
J. Cullis and P. Jones,
Public Finance and Public Choice,
Oxford University Press, New York, 2nd Ed., 1998.
21.
The acclaimed definition first came up in the widely used work
Macroeconomics
by Dornbusch and Fisher which is now available as R.S. Dornbusch, S. Fisher and Richard Startz,
Microeconomics,
Tata McGraw-Hill, N. Delhi, 8th Ed., 2002.
22.
John Hicks, the British Nobel Laureate did show it referring changes in taxes and government expenditure using the framework of the famous IS-LM model (
Ibid
).
23.
S. R. Maheshwari,
A Dictionary of Public Administration,
Orient Longman, N. Delhi, 2002, p. 227.
24.
In his acclaimed work
The General Theory of Employment, Interest and Money,
1936.
25.
Stiglitz and Walsh,
Economics,
op. cit., p. 729.
26.
Samuelson and Nordhaus,
Economics,
op.cit., p. 412.
27.
Based on the elaboration by Samuelson and Nordhaus,
Economics,
op. cit., pp. 412–13.
28.
For data-based detailed discussion refer to Sudipto Mundle and M. Govinda Rao,
Issues in Fiscal Policy
in Bimal Jalan (ed.),
The Indian Economy: Problems and Prospects,
Penguin Books, N. Delhi, Revised Edition, 2004, pp. 258–85.
29.
This was the general feeling among the experts, policymakers and the IMF, alike.
30.
The proximate cause of the payment crisis in the mainstream perspective, was faulty macroeconomic policies, specially large fiscal deficits of the government during 1984–91, deficits that spilled over in country’s current account of the balance of payment. (Mihir Rakshit, ‘
The Micro-economic Adjustment Programme: A Critique’, Economic and Political Weekly 26,
no. 34 (August), quoted by Mihir Rakshit,
‘Some Microeconomics of India’s Reform Experience’
in Kaushik Basu (ed.),
India’s Emerging Economy: Performance and Prospects in the 1990s and Beyond,
Oxford University Press, N. Delhi, 2004, p. 84.
31.
S. D. Tendulkar and T.A. Bavani,
Understanding Reforms,
Oxford University Press, N. Delhi, 2007, p. 73.
32.
Bimal Jalan,
India’s Economic Policy,
Penguin Books, N. Delhi, 1992, p. 48.
33.
Handbook of Statistics on the Economy 2002–03,
RBI, Table 221 (cited by
Tendulkar
and
Bhavani,
2007, op. cit., p. 74)
34.
Bimal Jalan, 1992, op. cit., p. 50
35.
The Report of Tenth Finance Commission,
N. Delhi, 1994 (
quoted by Bimal Jalan, 1992, op. cit., p. 50).
36.
This scheme has changed now. After the implementation of the suggestions of the
12th Finance Commission
states are now allowed to go for market borrowings to take care of their plan expenditures once they have passed and enacted their Fiscal Responsibility Acts (FRAs) in consonance with the FRBM Act, 2003.
37.
Based on the points raised by Bimal Jalan, 1992, op. cit., p. 49.
38.
t
his factor seems getting redressal with the starting of
outcome
and
performance
budgeting 2004–05 onwards.
39.
Economic Survey 2006–07,
MoF, GoI, N. Delhi, p.18.
40.
Ibid.
41.
Ibid.
42.
Economic Survey 2003–04,
MoF, GoI, N. Delhi.
43.
Economic Survey 2006–07,
op. cit., p. 18.
44.
Ibid.
45.
Ibid.
46.
Opposite to it, in the U.K., the government has overriding powers on the central bank and there is absence of any legal checks on money creation powers of the government. Once the UK becomes part of the European Union it will come under such a check through the Maastricht Treaty. Before the enactment of the FRBMA, 2003. India was like the U.K, however, the Constitution of India has a provision for imposing a statutory limit on the centre’s borrowing powers under
Article 292.
But the Article is not mandatory and has not been invoked by any of the governments till date.
47.
By the Congress passing the Balanced Budget Act, 1997 which promised to eliminate federal deficit spending by 2002 (see
Nicholas Henry,
Public Administration and Public Policy,
Prentice-Hall, N. Delhi, 8th Ed., 2003, p. 217).
48.
Argentina introduced this arrangement in the late 1990s.
49.
Economic Survey 1994–95,
MoF, GoI, N. Delhi.
50.
IMF imposed some macro-economic conditions on the economy while India borrowed from it for its BoP correction in 1990–91. One among the conditions was cutting down the government expenditure (i.e., salaries, pensions, interest and subsidies, etc.) by 10 per cent every year.
51.
George R. Terry and Stephen G. Franklin,
Principles of Management,
AITBS, N. Delhi, 8th Ed., 2002, pp. 9–10.
52.
See Peter A. Phyrr,
The
z
ero Base Approach to Government Budgeting,
Public Administration Review, 37 (Jan./Feb., 1977), p. 7 and Thomas P. Lauth,
Zero-Base Budgeting in Georgia State Government: Myth and Reality,
Public Administration Review, 38 (Sept./Oct., 1978) pp. 420–30 (cited in Nicholar Henry,
Public Administration and Public Affairs,
Prentice-Hall, N. Delhi, 8th Ed., 2003, p. 217).
53.
Nicholas Henry, 2003, op. cit., p. 218.
54.
In the Constitution of India it is deliberated in the
Article 112 (3), a - g
where it is referred as
‘expenditure charged’
on the consolidated fund of India—popular as the ‘charged expenditure’ (see
The Constitution of India, Ministry of Law, Justice and Company Affairs,
GoI, N. Delhi, 1999, pp. 38–39).
55.
See Samuelson and Nordhaus,
Economics,
op.cit., p. 710;
s
tiglitz and Walsh,
Economics,
op. cit., pp. 552–54.
56.
Mathew Bishop,
Pocket Economist,
op. cit., p. 104.
57.
Union Budget 2006–07,
MoF, GoI, N. Delhi.
58.
Based on the notes released by the Ministry of Finance, GoI, October 2006 while releasing the
Quarterly Review
of the Union Budget 2006–07.
59.
Embedded in
Article 113,
of the
Constitution of India
and derived on the lines of the British budgetary conventions.
60.
Dirk Schoenmaker,
“A New Financial Stability Framework for Europe”,
The Financial Regulator
, Vol.13 (3), 2009.
61.
Edward Chancellor,
“Germany’s Eurozone trilemma”,
Financial Times
, Nov. 6, 2011.
62.
Martin Wolf,
“The political genius of supply side economics”,
Financial Times
, July 25, 2010.
63.
Dani Rodrik,
“The inescapable trilemma of the world economy”, June 27, 2007,
(rodrik.typepad.com/dani_rodriks_weblog.)
64.
Niall Ferguson,
“Conservatism and the Crisis: A Transatlantic Trilemma”, Centre for Policy Studies, Ruttenberg Lecture, March 24, 2009.
65.
Economic Survey 2011-12,
op. cit., p. 69
66.
The discussion is based on the releases of various
Ministries, Departments
and
Statutory
and
Non-statutory Bodies
of the
GoI
. The data used are soley taken from the latest
Economic Survey 2012-13
and the
Union Budget 2013-14
– any other data, if used, their sources have been given in brackets following them.