18.16 ndian onom
due to a high level of external borrowings. The and reached the highest level of 3.26 per
IMF support to fight the crisis came in but with cent of the GDP in 1990–91.33
many macro-economic conditionalities, checking (iii) The fiscal situation of the states was not
the fiscal meance being a major one among good either. State governments which
them. With the process of economic reforms are primarily responsible for health,
which started in 1991–92, the government also education and other social services had
announced its commitment to reduce fiscal deficit an aggregate revenue expenditure of 5 per
to 3–4 per cent (of GDP) by the mid-1990s (from cent of GDP on these accounts while their
the level of about 8 per cent during 1987–90). capital expenditure accounted for 2.5 per
This step was among the many measures which cent on social and other sectors.34 The
the government started with the objective of states’ expenditure on the social sector
stabilising the economy. We may have a look at went down while their interest payments
India’s fiscal situation upto the 1990–91 in the had increased during the 1980s.35
following way: As per the experts, the debt situation in the
(i) The fiscal deficits of the central states would have been even worse, but for the
government, after averaging below 4 per fact that the states, unlike the Centre, did not
cent of the GDP till the 1970s started have independent powers to borrow either from
climbing up by being 5.77 per cent in the RBI or the market because of the statutory
1980–81, 8.47 per cent in 1986–87 overdraft regulatory scheme.36 Thus, their deficits
ending up at 7.85 per cent in 1990–91 have been self-limiting—whenever the states
after being above 7 per cent in the second tried to cut down their deficits the care of the
half of the 1980s.31 social sector and capital expenditure suffered and
development prospects in the states also suffered.
(ii) The revenue (i.e., current) expenditure
Now the question arises that why the
of the government (Centre and states
government has not been able to check the
combined) increased from 11.8 per cent
menace of fiscal deficits even though there has
of GDP to 23 per cent between 1960
been a consensus to do so? There are reasons37
and 1990. The revenue receipts of the
which can be cited for it:
government also went up on an average
(i) Political factor: The political lobbies and
of 14.6 per cent in 1971–75 to 20 per
sectional politics as well as the subsidies
cent in 1986–1990. But the gap between
revenue receipts and expenditures 33. Handbook of Statistics on the Economy 2002–03,
remained negative—financed largely Reserve Bank of India, Table 221 (cited by Tendulkar
and Bhavani, Understanding Reforms, p. 74).
by domestic borrowings (as a result the
34. Bimal Jalan, India’s Economic Policy, p. 50
interest payments on domestic debt 35. Reserve Bank of India, The Report of Tenth Finance
increased from 0.5 to 2.5 per cent of the Commission (New Delhi, Government of India, 1994)
GDP during 1975–90.32 The revenue as quoted in imal alan, ndia s conomic olicy,
p. 50.
deficit went on increasing after 1979–80
36. This scheme has changed now. After the implementation
of the suggestions of the 12th Finance Commission states
31. s. D. Tendulkar and T.A. Bavani, Understanding
are now allowed to go for market borrowings to take care of
Reforms (New Delhi: Oxford University Press, 2007) their plan expenditures once they have passed and enacted
p. 73. their Fiscal Responsibility Acts (FRAs) in consonance with
32. Bimal Jalan, India’s Economic Policy ( New Delhi: the FRBM Act, 2003.
Penguin Books, 1992) p. 48. 37. Based on the points raised by Bimal Jalan, p. 49.