No. 38, December 2004

No. 38
(December 2004):

The UPA Government's Economic Policies

Squeezing the People by Squeezing State Finances

[Note: a 'crore' is ten million]

Since 1997, World Bank strategy for India has focussed on 'structural adjustment' by the state governments. Accordingly, the Central government is fond of lecturing state governments on the need to carry out fiscal reforms. The states are told to slash their expenditures, and raise revenues by increasing electricity tariffs, bus fares, hospital user charges, water rates, and so on — in other words, squeeze the people. The Central government has also begun an 'incentive fund' scheme whereby states actively implementing 'reforms' will be rewarded with larger grants and those who fail to 'reform' will be punished with smaller grants. Yet the Centre's policies have worsened the states' finances, leading to worsening conditions for the poor.

It is not the Central government, but the state governments, that have the greatest direct interface with the people, and are responsible for the great bulk of 'developmental' expenditure.1 'Developmental' expenditure comprises both economic services and social services. Economic services include agriculture, rural development, irrigation, energy, industry and minerals, transport and communications. Social services include education, public health, water supply and sanitation, housing, welfare of Scheduled Castes and Scheduled Tribes, labour welfare, social security, nutrition, relief on account of natural calamities, and urban development. These are a vast range of services that have an impact on the lives of ordinary people.

During the period of 'liberalisation' the developmental expenditures of the states fell as a share of their total expenditures, and as a share of Gross Domestic Product (GDP). In 1990-91, before the initiation of the IMF-dictated programme, the states' developmental expenditures were 10.17 per cent of GDP; by 2001-02 they had fallen to 8.91 per cent of GDP. (Table 1, col. 6) Had states' developmental expenditures remained at the same percentage of GDP in 2001-02 as before 'liberalisation', they would have been Rs 29,000 crore higher.

During the same period, the net transfers that the states received from the Centre shrank from 5.57 per cent of GDP to 3.35 per cent. (Table 1, col. 4) Had the net transfers from the Centre remained in 2001-02 at the same level as in 1990-91, they would have been Rs 50,500 crore higher.

In this period the interest paid by the states on their loans from the Centre rose steeply, from Rs 5,178 crore in 1990-91 to Rs 29,442 crore in 2001-02. (Table 2, col. 2) Their total debt-servicing on loans from the Centre (that is, including their loan repayments) rose from Rs 9,175 crore to Rs 43,128 crore. (Table 2, col. 4) Meanwhile the fresh loans from the Centre rose much more slowly, from Rs 13,974 crore to Rs 24,660 crore. (Table 2, col. 5) As a result, whereas in 1990-91 the states used to receive Rs 4,800 crore more in loans than they paid out in debt service to the Centre, by 2001-02 they were paying the Centre Rs 18,468 crore more in debt service than they were receiving in fresh loans! (Table 2, col. 6) Thus there was a massive negative net flow on the states' debt account with the Centre.

One major reason for this massive negative net flow was the soaring interest rates that states were paying on their debt to the Centre. The average annual interest rate on states' debt to the Centre rose from 8.32 per cent in 1990-91 to 12.96 per cent in 2003-04. (Table 3, col. 7)

It is striking that there is an increasing gap between the average interest rate paid by the Centre on its debt and the average interest rate paid by the states to the Centre. This gap has increased from 0.31 percentage points in 1990-91 to a massive 4.99 percentage points in 2003-04. (Table 3, col. 8) In other words, the Centre pays Rs 8 as interest on each Rs 100 of its debt, and extracts Rs 13 on each Rs 100 of its loans to the states, earning Rs 5 in the bargain.

Had the states paid the Centre at the interest rate the Centre itself pays on its own debt, they would have had to pay Rs 12,171 crore less in 2003-04 alone. (Table 3, col. 9) But even this way of putting it does not reflect the full burden on the states, since the states' borrowing itself has climbed faster because of the higher interest rates. The total excess interest payments by the states to the Centre between 1991-92 and 2003-04 thus amount to almost Rs 56,000 crore.

Recently, the extortionate nature of the interest rates paid by the states became too glaring to ignore. Finally, in 2002-03, the Central government introduced a "Debt Swap Scheme", whereby the states would be allowed to pre-pay high-cost Central loans (interest rate over 13 per cent), in exchange for fresh market loans at the prevailing interest rates and small savings proceeds at 9.5 per cent. There is also a proposal in the Planning Commission that the Centre write off the entire debt of the states to the Centre. The state governments have requested that the Centre at least waive interest payments on this debt. However, the Union finance ministry has turned down these proposals, and is only willing to continue swapping higher cost debt with lower cost debt. There is no discussion of the fact of the excess interest paid by the states over recent years, and the damage this has done to state finances.

The state governments and the Centre are both organs of the Indian State. They pursue the same economic policies. As such the sharing of resources between them would be of no particular interest to the people at large. However, given the division of labour between the Centre and the states, whereby the states bear the bulk of expenditures in the areas that most concern the people, a shift of resources from the states to the Centre is one more expression of the increasingly parasitical character of the Indian State.


1. By contrast, the Centre will spend upto Rs 100,000 crore (Rs one trillion) on the military this year — see the separate article on the Union budget in this issue.] (back)

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