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.