View of GROWTH EXPERIENCE OF INDIAN ECONOMY IN THE ERA OF GLOBALISATION

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Vol.02, Issue 03, March 2017, Available Online: www.ajeee.co.in/index.php/AJEEE

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GROWTH EXPERIENCE OF INDIAN ECONOMY IN THE ERA OF GLOBALISATION Dr. Umme Kulsum

Associate Professor, T.R.K.M. Aligarh)

Abstract - Economic growth is an increase in the production of goods and services in an economy. Increases in capital goods, labor force, technology, and human capital can all contribute to economic growth. Since the mid-1980s, India has slowly opened up its markets through economic liberalization. After more fundamental reforms since 1991 and their renewal in the 2000s, India has progressed towards a free market economy. In the late 2000s, India's growth reached 7.5%, which will double the average income in a decade. This paper highlights various growth phases of Indian economy during globalization era and also discusses the sectoral component GDP.

1INTRODUCTION

Indian growth experience has been an area of intense research for a long time. It remains a puzzle that higher rate of savings have not resulted in higher rate of growth of Indian economy. While it may be true that the capital - output ratio has risen on the margin, it is not clear what the factors are which have contributed to this process on economy – wise basis?

Moreover, the growth rate viewed as a product of the marginal capital - output ratio and savings ratio is at best equilibrium, relationship and often little more than an accounting framework. In either case, it does not till a casual story¹.

Is it possible to argue that the rise in the capital output ratio has something to do with the operation of demand factors in our development process?

Normally, such a question would be answered in the negative wisdom has been that a rise in the capital output ratio is an increased inefficiency of resource utilization. But this is only a part of the story, there are some economies - wise processes which cannot be ignored and which are at least in part connected with demand factors.²

2 LONG-TERM GROWTH OF THE INDIAN ECONOMY AND VARIOUS PHASES OF GROWTH A basic question that is repeatedly asked in this context is that: what is the long – term trend growth rate of the Indian economy? Does the notion of the so-called

„Hindu rate of growth‟ adequately characterise Indian reality [Raj Krishna³ (1983)]. or, in actually, has the long run growth rate surpassed the 3.5 per cent threshold [Raj⁴ (1984)]? Was there an improvement in GDP growth since 1999- 2000?

A PERIODISATION SCHEME

In this context, one needs a choice of periodisation in looking at the secular growth experience instead of adopting the somewhat mechanical break - up with regard to decades or plan periods. We tried to look into the breaks in the GDP series. We adopt the following four period schemes:

(I)1980-81 TO 1985-86(period I)

During these five-year‟s period we analyse that Indian economy accelerated at very fast rate of growth and this breakthrough has been due to the improvement in agriculture. The percentage change in Agriculture Sector in 1980-81 is 3 to 25 percent and in 1983-84, 6 to 20 percent.

As Ahluwalia⁵ (1988) has noted, was the improved performance in agriculture, which not only contributed directly to faster GDP growth but also gave fill - up to industrial growth.

(II) 1986-87 to 1990-91 (period II) Period II also shows improvement in the rate of economic growth and these growths are due to the improvement in agricultural and manufactured sectors.

As we compare the period 1987-88 to 1989-90, the percentage change in GDP is 13% to 19%. Due to this agricultural sector growth is 4% to 11% of GDP and in manufacturing sector 10% to 14% of GDP.

(III) 1991-92 to 1995-96 (Period III) As regard the rest of the time span, we select the crisis year of 1991-92 as the line of demarcation, after all a host of liberalization measures started since then. Apart from this, the experience of 6 per cent plus growth rate on a reasonably

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2 consistent basis is a phenomenon of the nineties.

(IV) 1995-96 to 1999-2000 (Period IV) The economic survey⁶ pointed out that investment had slackened considerably since 1996-97. There was a decline in capital goods production. India registered its lowest ever growth rates of 2.6%

during 1997-98. This slow down in GDP growth, was largely the result of the volatility in agricultural growth, which collapsed to –1.0 per cent in 1997-98.

This marked the equally sharp slowdown in growth of GDP from manufacturing to 7.7% per cent in 1997-98 (from 15% in year before).

2SECTORAL COMPOSITION OF GDP

The sectoral composition of GDP are broadly divided into three sub-sectors (1) Primary (2) Secondary and (3) tertiary sector. Primary sector includes agricultural products. Agricultural products involve, agriculture, forestry and logging, fishing, etc., secondary sector includes industrial products. In industrial products we involve industry, mining quarrying and manufacturing. Tertiary sector involves services. In service‟s sector we take service, trade, hotels and restaurants, transport, storage and communication.

Now we may discuss the sector-wise classification of GDP during the twenty years period from 1980-81 to 1999-00.

Table-5 (a) chart-5.1 shows that the overall GDP growth rate has declined over the period of study. This table also shows that during eighties the share of primary sector is larger than secondary and tertiary sector. In 1980-81 the share of primary sector is 38.5 per cent of GDP, in secondary sector its share is 24.5 percent of GDP and where as in tertiary sector the share is 11.4 percent of GDP. Now during nineties these ratios are somewhat changing. In the primary and secondary

sector shares are more or less equal. Now in 1999-00 primary sector‟s share is 27.1 per cent of GDP and secondary sector‟s share is 26.1 per cent of GDP.

3EMPIRICAL RESULTS

We have tried to prove empirically the validity of the proportion that sectoral classification of Indian economy viz.

primary, secondary and tertiary sector is assumed to have function of gross domestic production (GDP). Here is the estimation of linear equation for gross domestic product (GDP), primary sector (Ps), secondary sector (Ss) and tertiary sector (Ts).

(1) Ps = f (GDP)

PS = 3.2642+0.6602 GDP SEE = (0.197912) t = 3.3359 R² = 0.3820 d.f. = 18 (2) Ss = f (GDP)

SS = -1.6571 + 1.2539 SEE = 0.00725

t = 141.5092 R² = 0.9991 d.f. = 1 (3) Ts = f (GDP)

TS = -0.6954 + 0.8975 SEE = 0.1642

t = 5.2666 R² = 0.6241 d.f. = 18

In all above equations, it is evident from equation (1) that the coefficient of gross domestic product is found to be statistically significant at 5 percent level.

It explains about 38 percent of the variation in primary sector. In equation (2), it is statistically significant at 5 percent level and it explains about very high 99.9 percent of the variation in dependent variable. In equation (3) it is also statistically significant at 5 percent level and it explains about 62.41 percent variation in dependent variable.

Table - 5 (a)

SECTORAL COMPONENT OF ECONOMY

Years GDPC Primary Secondary Teritary GDPC Primary Secondary Teritary

Rs. Crore % of GDP

1980-81 130176 50592 31887 14906 19.5 38.8 24.5 11.4

1981-82 152056 56883 38533 17026 16.8 37.4 25.3 11.2

1982-83 169525 60881 43726 9812 11.4 35.91 25.7 11.6

1983-84 198630 72729 51150 22815 17.1 36.62 25.7 11.4

1984-85 222705 78288 58293 26124 12.1 35.15 26.2 11.7

1985-86 249547 84152 65868 29860 12 33.7 26.4 11.9

1986-87 278258 90541 73936 34651 11.5 32.5 26.5 12.4

1987-88 315993 100759 84303 40543 13.5 31.8 26.62 12.8

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1988-89 378491 123901 100687 47086 19.7 32.7 26.6 12.4

1989-90 438020 136891 120716 54511 15.7 31.25 27.5 12.4

1990-91 510954 159760 141215 62904 16.6 31.2 27.6 12.3

1991-92 589086 18571 155410 73368 15.2 31.5 26.3 12.4

1992-93 673221 208265 179946 84189 14.2 30.9 26.7 12.5

1993-94 781345 241967 205162 93632 16 30.9 26.2 11.9

1994-95 917058 278773 248537 106368 17.3 30.4 27.1 11.6

1995-96 1073271 303102 301771 126317 17 28.2 28.1 11.7

1996-97 1243546 362605 341146 146927 15.8 29.1 27.4 11.8

1997-98 1390042 387008 378500 175768 11.7 27.8 27.2 12.6

1998-99 161033 459900 42130 217219 16.2 28.4 26 13.4

1999-00 1796459 484221 465713 251890 10.5 27.1 26.1 14.1

Source: National Income Statistics Dec.2001

4GROWTH RATE BY AGRICULTURAL SECTOR The sector-wise classification of growth rate in primary sector is divided into three sub-sectors (1) agriculture (2) forestry &

logging and (3) fishing. Table-5(b) and chart- 5.2, shows that the share of agriculture is more than three quarters as compare to other sectors. During 1999-00 it was 24.8 per cent of GDP whereas in forestry, logging & fishing 1.1 per cent of GDP during the same year. This table also revealed that during this twenty-year‟s period of 1980-81 to 1999-00, growth rate in agricultural sector has declined; it was 35.6 per cent of GDP in 1980-81 whereas in 1999-00 it was only 24.8 per cent of GDP. The share of forestry and logging also declined during the period of study.

In 1980-81 its share was 2.5 per cent of GDP, whereas in 1999-00 it was only 1.1 per cent of GDP. Only the share of fishing has been increasing, it was 0.7 per cent in 1980-81 and in 1999-00 it became 1.1 per cent of GDP. The share of fishing has been increasing but at very small amount.

The overall Share of agriculture sector is increasing in India during these 20 years period. But this improvement is not satisfactory. This increasing trend is due to rapid adoption of new technologies, agricultural production and factor productivity as well as larger fluctuation of agricultural prices also⁷.

4.1 EMPERICAL RESULTS

We have tried to prove empirically the validity of the proposition that sectoral classification of agricultural sector is assumed to have the function of primary sector. Here is the estimation of linear equation for primary sector (PC), agriculture (Ag), forestry & logging (Fl) and fishing (fh).

(1) Ag = f (Pc)

Ag = 3.7743+ 0.6829 PC

SEE = 0.1182

t = 5.7758

R² = 0.6495 d.f. = 18 (2) Fl = f (Pc)

Fl = 3.14714 + 0.4977 PC

SEE = 0.08485

t = 5.8652

R² = -.6565 d.f. = 18 (3) Fh = f (Pc)

Fh = -2.61499 = 0.9335 PC

SEE = 0.1575

t = 5.9268

R² = 0.6612 d.f. = 18

In all above equations, it is evident from equation (1) that the coefficient of primary sector is found to be statistically significant at 5 percent level. It explains about 64 percent of the variation in agriculture. In equation (2) it is

CHART- 5.1

SECTORAL COMPONENTS OF ECONOMY

0 200000 400000 600000 800000 1000000 1200000 1400000 1600000 1800000 2000000

1981-82 1983-84

1985-86 1987-88

1989-90 1991-92

1993-94 1995-96

1997-98 1999-00 Years

Rs. Crore

GDPC Primary Secondary Teritary

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4 statistically significant at 5 percent level and it explains about 65.65 percent of the variation in dependent variable. In equation (3) it is also statistically

significant at 5 percent level and it explains about 66.12 percent variation in dependent variable.

Table- 5 (b)

SECTORWISE CLASSIFICATION OF AGRICULTURAL GROWTH RATE Years Agriculture Forestry

& Logging Fishing Agriculture Forestry

& Logging Fishing

1980-81 46332 3294 966 35.6 2.53 0.7

1981-82 51843 3984 1056 34.1 2.6 0.7

1982-83 55142 4509 1230 32.5 2.6 0.7

1983-84 66437 4775 1517 33.4 2.4 0.7

1984-85 71307 5143 1838 32 2.3 0.8

1985-86 76571 5410 2170 30.6 2.1 0.9

1986-87 82046 6023 2472 29.5 2.1 0.9

1987-88 91263 6543 2953 28.8 2.0 0.9

1988-89 113177 7285 3439 29.9 1.9 0.9

1989-90 124382 8443 4066 28.4 1.9 0.9

1990-91 145734 9061 4964 28.5 1.7 1.0

1991-92 170767 9372 5573 28.9 1.5 0.9

1992-93 191243 10096 6973 28.4 1.5 1.0

1993-94 221834 11454 8679 28.3 1.4 1.1

1994-95 255193 12978 10602 27.8 1.4 1.1

1995-96 277846 13390 11866 25.8 1.2 1.1

1996-97 334029 14493 14083 26.8 1.2 1.1

1997-98 353490 16249 17269 25.4 1.2 1.2

1998-99 423247 18574 18079 26.2 1.1 1.1

1999-00 443923 19916 20382 24.8 1.1 1.1

Source: National Income Statistics, Dec.2001 5GROWTH RATE OF INDUSTRIAL SECTOR

The sector-wise classification of secondary sector is broadly divided into three sub- sectors (1) Industry (2) Mining and Quarrying and (3) Manufacturing. The Table-5(c) and chart- 5.3, shows that the overall trend of industrial sector growth rate has increased during the period of study (1980-81 to 1999-2000). The period of 1980‟s can broadly be termed as period of industrial recovery. The period of 1980- 81 to 1985-86 was marked by significant acceleration in the growth of value added in the manufacturing sector. The value added in manufacturing sector grew 7.5%

per annum in the first half of 80‟s as against only 5% per annum in the period of 1966-67 to 1980-81⁸. As shown in Table-5(c), if we compare these three sub- sectors we find that industry has the highest share, 26 per cent of GDP in 1999-2000. Manufacturing is on the second place, 5.3 per cent of GDP in 1999-2000 and Mining and Quarrying have very little share, only 2.1 per cent of GDP in 1999-2000. This table also revealed that during these twenty years period of study, 1995-96 is the period in which the industrial sector achieved growth rate. It was 28.1 per cent of GDP

CHART-5.2 SECTOR-WISE CLASSIFICATION OF AGRICULTURAL

GROWTH RATE

0 50000 100000 150000 200000 250000 300000 350000 400000 450000 500000

1981-82 1983-84

1985-86 1987-88

1989-90 1991-92

1993-94 1995-96

1997-98 1999-00 Years

Rs. Crore

Agriculture Forestry & Logging Fishing

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5 in industry, 18.0 per cent of GDP in manufacturing and 2.3 per cent of GDP in mining and quarrying. And this high rate of growth was achieved the highest because of the growth of capital goods and consumer durable goods sector.

Capital goods sector registered a phenomenal growth of 24.8 percent in 1994-95 and a whopping 37.1 percent growth in 1995-96⁹.

5.1EMPIRICAL RESULTS

We have tried to prove empirically the validity of the proposition that the sectoral classification of industrial sector viz, mining & quarrying industry and manufacturing is assumed to have the function of secondary sector. Here is the estimation of linear equation for secondary sector (SS), mining and quarrying (MQ), Industry (In) and manufacturing (Mf).

(1) MQ = f (Ss)

MQ = 2.5808+ 0.5974 SS

SEE = 0.18353

t = 3.2551

R² = 0.3705 d.f. = 18 (2) In = f (Ss)

In = -1.72304+ 1.13815 SS

SEE = 0.14157

t = 8.03942

R² = 0.7822 d.f = 18 (3) Mf = f (Ss)

Mf = -3.2070 + 1.2249 SS

SEE = 0.24518

t = 4.9959

R² = 0.5810 d.f = 18

In all above equations, it is evident from equation (1) that the coefficient of secondary sector is found to be statistically significant at 5 percent level.

It explains about 37.05 percent of variation in Mining and Quarrying. In equation (2), it is statistically significant at 5 percent level and it explains about 78.22 percent variation in dependent variable. In equation (3), it is also statistically significant at 5 percent level and it explains 58.10 percent variation in dependent variable.

Table - 5 (C)

SECTOR-WISE CALSSIFICATION OF INDUSTIAL GROWTH RATE Years Mining &

Quarring Industry Manufecturing Mining &

Quarring Industry Manufacturing

1980-81 2274 31887 2117 1.7 24.5 16.2

1981-82 4236 38533 2472 2.7 25.3 16.2

1982-83 52448 43726 27510 3.1 25.7 16.2

1983-84 5857 5110 32438 2.9 25.7 16.3

1984-85 6507 58293 36591 2.9 26.1 16.4

1985-86 6943 65868 41018 2.7 26.4 16.4

1986-87 8096 73936 45311 2.9 26.5 16.2

1987-88 8426 84303 51875 2.6 26.6 16.4

1988-89 10948 100687 61738 2.8 26.6 16.3

1989-90 12260 120716 75729 2.8 27.5 17.2

1990-91 14026 141215 87575 2.7 27.6 17.1

1991-92 15232 155410 94650 2.5 26.3 16.0

1992-93 17273 179946 109050 2.5 26.7 16.2

1993-94 20092 205162 125493 2.5 26.2 16.0

1994-95 22659 248537 155427 2.4 27.1 16.9

1995-96 25256 301771 193801 2.3 28.1 18.0

1996-97 27702 341146 220675 2.2 27.4 17.7

1997-98 33427 378500 231981 2.4 27.2 16.6

1998-99 35105 42130 251793 2.1 26.0 15.5

1999-00 38164 465713 274603 2.1 26.0 15.3

Source: National Income Statistics, Dec.2001

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6 6GROWTH RATE OF SERVICES OR TERTIARY SECTOR

Sector-wise classification of Tertiary sector growth rate are broadly divided into three sub-sectors (1) service (2) Trade, hotels and restaurants (3) Transport, storage & communication.

Table-5(d) and chart- 5.4, shows that the share of tertiary sector has increased during the period of study. This table also revealed that among these three sub- sectors service has the highest share it is 48.6 per cent of GDP in 1999-2000, then trade, hotels and restaurants, 13.8 per cent of GDP in 1999-2000 and transport, storage and communication have the lowest share, 6.8 per cent of GDP in 1999-2000.

6.1EMPIRICAL RESULTS

We have tried to check empirically the validity of the proposition that the sector – wise classification of tertiary sector is assumed to have the function of tertiary sector. Here is the estimation of linear equation for tertiary sector (T), Services(S), Trade, hotels and restaurants (Thr), Transports, storage and communication (Tsc).

(1) S = f (T)

S = 3039 + 3.4347 T SEE = 0.05839

t = 58.81

R² = 0.99 d.f = 18 (2) Thr = f (T)

Thr = 1637 + 1.0409 T SEE = 0.05839

t = 40.25

R² = o.98 d.f = 18 (3) Tsc = f (T)

Tsc = 5985 + 0.8325 T SEE = 0.4796

t = 1.7358

R² = 0.1434 d.f = 18 In all above equations, it is evident from equation (1) that the coefficient of tertiary sector is found to be statistically significant at 5 per cent level. It explains about 99 per cent variation in services. In equation (2) it is also statistically significant at 5 per cent level and it explains about 98 per cent of the variation in dependent variable. Equation (3) is also statistically significant at 5 per cent level and it explains about 14 per cent variation in dependent variable.

CHART- 5.3 SECTOR-WISE CLASSIFICATION OF INDUSTRIAL

GROWTH RATE

0 5 10 15 20 25 30

1981-82 1983-84

1985-86 1987-88

1989-90 1991-92

1993-94 1995-96

1997-98 1999-00 Years

% of GDP

Mining & Quarring Industry Manufacturing

CHART- 5.4 SECTOR-WISE CLASSIFICATION OF SERVICE

SECTOR GROWTH RATE

0 200000 400000 600000 800000 1000000

1981-82 1983-84

1985-86 1987-88

1989-90 1991-92

1993-94 1995-96

1997-98 1999-00 Years

Rs.crore

Service

Trade,Hotels & Restaurant Transport, Storage & Comminication

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7 Table - 5 (d)

SECTORWISE CLASSIFICATION OF SERVICE SECTOR GROWTH RATE Years Service Trade, Hotels

& Restaurant

Transport, Storage &

Comminication Service Trade, Hotels

& Restaurant

Transport, Storage &

Comminication

1980-81 47696 15059 5876 36.6 11.5 4.5

1981-82 56640 18448 7121 37.2 12.1 4.6

1982-83 64917 20425 8507 38.2 12.0 5.0

1983-84 74751 23519 9886 37.6 11.8 4.9

1984-85 86124 27327 11270 38.6 12.2 5.0

1985-86 99527 31805 13202 39.8 12.7 5.2

1986-87 113782 35372 15477 40.8 12.7 5.5

1987-88 130931 39364 18649 41.4 12.4 5.9

1988-89 153903 46460 22210 40.6 12.2 5.8

1989-90 180412 54447 26011 41.2 12.4 5.9

1990-91 209980 63566 30413 41.1 12.4 5.9

1991-92 247964 72491 35658 42 12.3 6.0

1992-93 285010 84539 42841 42.3 12.5 6.3

1993-94 334216 99369 51131 42.7 12.7 6.5

1994-95 389748 119240 61123 42.5 13.0 6.6

1995-96 468398 146263 707281 43.6 13.6 6.5

1996-97 539795 171653 83632 43.4 13.8 6.7

1997-98 624534 194526 97439 44.9 13.9 7.00

1998-99 734832 224727 111311 45.4 13.9 6.80

1999-00 836525 246967 122590 46.8 13.8 6.8

Source: National Income Statistic, Dec. 2001.

7 FISCAL CORRECTION FOR ECONOMIC GROWTH

7.1CENTRAL GOVERNMENT FINANCES

In order to understand the current fiscal predicament of the central govt. it is necessary to examine the pattern of the central govt. expenditure and revenues over at least the last 20 years. The total expenditure of the central govt. increased from an average of 16.8 per cent in 1980- 85 to about 20.5 per cent of GDP in 1985- 90 and then declined between 16 to 17.5 per cent in the late 1990‟s. At the same time non-plan expenditure has increased substantially from about 10 per cent in the early 1980‟s to about 13 per cent of GDP now (Table-5(e) and chart-14). What is the most notable is the very significant increase in expenditure that occurred in

the second half of the 1980‟s. These increases took place in almost all categories of non-plan expenditure such as interest payments, defence expenditure, subsidies, pensions and loans to states. During this period other non-plan expenditure, which consist mostly of salary payments to govt.

servants remained roughly stationary at about 2.25 per cent of GDP. Plan expenditure was kept high at about 6.5 per cent to 7 per cent of GDP throughout the 1980s. Correspondingly capital expenditures of central govt. were sustained at levels of 6 per cent to 7 per cent of GDP. Both plan expenditures and capital expenditures of the central govt.

have fallen to levels of about 4 per cent of GDP or less now.

Table - 5 (e)

PROFILE OF EXPENDITURE OF CENTRAL GOVERNMENT (%OF GDP)

1980/85 1985/90 1990/95 1995/99 1997/98 1998/99 1999/2000

1) Non-Plan Expend. 10.1 13.4 12.7 12.2 12.2 13.1 11.4

a) Interest Payment 2.2 3.4 4.4 4.6 4.6 4.7 4.9

b) Defence 2.8 3.3 2.6 2.4 2.5 2.5 2.5

c) Total Subsidy 1.4 1.9 1.8 1.3 1.4 1.5 1.3

Food Sabsidy 0.4 0.6 0.5 0.5 0.5 0.5 0.4

Other Subsidy 0.9 1.3 1.3 0.8 0.8 0.9 0.8

d) Police 0.2 0.3 0.3 0.3 0.3 0.3 0.3

e) Pension 0.2 0.4 0.4 0.5 0.5 0.6 0.5

f) Loan & odrnceto state

& UTS 0.5 1.2 0.9 1.1 1.1 1.4 0.0

g) Grants to state & UTS 0.4 0.6 0.5 0.4 0.3 0.3 0.4

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Source: Govt. of India, Budget Documents Various years.

It is now useful to examine the revenue pattern of the central government over the last 20 (Table-5{f} and chart-5.6) years to understand how debt service payments have been increasing so continuously. Corresponding to the increase in expenditure in the late 1980s an attempt was clearly made to increase revenues also over that period. The main increase in revenues took place in collection from custom duties, rising from about 2.8 per cent of GDP in the early 1980‟s to about 3.9 per cent in the late 1980s. This happened both as a consequence of increased imports (which led to the balance of payments crisis) and increase in level of custom duties. The latter of course led to greater inefficiency in resource allocation as well as decline in export competitiveness. By the end of the 1980s, at an average of almost 110 per cent, India probably had the highest level of custom duties in the world. Subsequent to the economic reforms in 1991 there has been a consistent increase in the share of direct taxes from about 2 per cent of GDP right through the 1980s to about 3 per cent now. This increase has taken place both in corporate income tax collection and in personal income tax collection despite reduction in rates.

The loss in tax revenues has taken place in indirect taxes, both in custom and excise duties. Whereas the custom duties collections were expected to fall as a rate of major cuts in custom duties levels, the fall in excise duty collection is more difficult to understand. In principle, rise in industrial production should give rise buoyancy in excise duty collection level as a proportion of GDP. However, various factors have inhibited such expected growth.

First, apart from the period of 1993-96, industrial growth has share not been as high as had been expected from the economic reforms. Thus, the contribution of industry in GDP has remained stagnant. It is the share of services that has risen continuously and services largely remain untaxed at the central level. Second, the progressive extension of MODVAT to the whole industrial sector has also led to fall in excise duty collection as a proportion of GDP. The share of non-tax revenues has remained stagnant between 2.6 per cent and 3 per cent since the mid-1980. Higher investment has not provided higher returns¹⁰.

CHART-5.5 PROFILE OF TOTAL EXPENDITURE OF CENTRAL

GOVERNMENT

0 5 10 15 20 25

1980/85 1985/90 1990/95 1995/99 1997/98 1998/99 1999/2000 Years

% of GDP

1) Non-Plan Expend.

a) Interest Payment b) Defence c) Total Subsidy 2) Food Subsidy Other Subsidy d) Police e) Pension f) Loan & odrnceto state &

UTSg) Grants to state & UTS h) Other Non-Plan expend.

2) Plan expenditures 3) Total Expend. ( Plan&

Non.P.) 4) Capital Expend 5) Revenue Expend.

6) Developmental 7) Non-Developmental Total Expend.(Deve+Non Deve.)

h) Other Non-Plan

expend. 2.2 2.2 1.8 1.5 1.4 1.6 1.4

2) Plan expenditures 6.7 7.0 5.2 4.2 4.2 4.2 4.3

3) Total Expend. ( Plan&

Non.P.) 16.8 20.5 17.9 16.3 16.4 17.4 15.7

4) Capital Expend 6.1 6.8 4.6 3.6 3.6 3.9 2.6

5) Revenue Expend. 10.7 13.7 13.3 12.8 12.7 13.4 13.1

6) Developmental 10.7 11.4 9.5 7.7 8.0 7.9 NA

7) Non-Developmental 7.3 8.8 8.9 8.9 9.1 9.0 NA

Total Expend.(Deve+Non

Deve.) 18.1 20.1 18.4 16.6 17.1 16.9 NA

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9 Table - 5 (f)

PROFILE OF TOTAL REVENUES OF THE CENTRAL GOVERNMENT (% OF GDP)

Revenue Recipts (net) = (Gross tax revenue - share of states) + Non tax revenue, Source: Govt. of India, Budget Documents, Various years.

7.2STATE GOVERNMENT FINANCES

Having documented the sorry state of central government finances it is now useful to examine the state finances. We can renew ourselves of the function of the state governments in order to appreciate the deleterious effects of deteriorating state finances on the economic security of the country. State govt. is responsible for most public expenditures for the provision

of social services. Further, they are responsible for most infrastructure services except for telecommunications, civil aviation, railways and major ports.

They are also responsible for law and order. Thus, the deterioration of the states ability to invest is very serious for human development and hence for internal security, in addition to the harmful effects on economic growth¹¹. TABLE- 5(g)

PROFILE OF TOTAL EXPENDITURE OF STATE GOVT. (% OF GDP)

Category 1980/85 1985/90 1990/95 1995/99 1997/98 1998/99 (A) Revenue expendiutre (I+II+III) 11.1 13.1 13.6 13.5 13.9 14.1

I- Developmental 7.9 9.1 8.9 8.1 8.5 7.8

II-Non Development 3.1 3.8 4.6 5.2 5.2 6.0

Interests payments & debt

servicing 0.9 1.5 2.0 2.2 2.3 2.3

Pensions 0.3 0.5 0.6 0.8 0.8 0.9

other expenditure 1.9 1.7 2.0 2.2 2.1 2.8

III- other expenditure 0.1 0.1 0.2 0.2 0.2 0.2

(B) Capital Disbursments 5.0 4.3 3.4 2.8 3.0 2.8

I-Total Capital Outlay 2.1 2.0 1.6 1.6 1.7 1.5

CHART-5.6 PROFILE OF TOTAL REVENUE OF CENTRAL

GOVERNMENT

0 2 4 6 8 10 12

1980/85 1985/90

1990/95 1995/99

1997/98 1998/99

1999/2000

Years

% of GDP

Revenue Receipts Gross tax revenue Direct taxes

Corporate Income Indirect taxes

Customs Excise Other tax revenue

Share of states in tax revenue Non-tax revenue

1980/85 1985/90 1990/95 1995/99 1997/98 1998/99 1999/2000 Revenue

Receipts 9.4 11.1 10.1 9.7 9.4 9.7 9.6

Gross tax

revenue 9.9 11.2 10.3 9.7 9.8 9.1 9.3

Direct taxes 2.1 2.1 2.4 2.8 2.6 3.0 3.0

Corporate 1.2 1.0 1.2 1.5 1.4 1.7 1.6

Income 0.9 1.0 1.1 1.3 1.2 1.3 1.4

Indirect taxes 7.5 8.8 7.5 6.4 6.2 5.9 6.0

Customs 2.8 3.9 3.3 3.0 2.8 2.6 2.7

Excise 4.7 4.9 4.3 3.4 3.4 3.3 3.3

Other tax

revenue 0.4 0.3 0.3 0.5 1.0 0.3 0.3

Share of states

in tax revenue 2.6 2.8 2.7 2.7 3.1 2.4 2.5

Non-tax

revenue 2.1 2.8 2.6 2.7 2.7 2.9 2.8

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10

Developmental 2.1 1.9 1.6 1.5 1.6 1.4

Non-Developmental 0.1 0.1 0.0 0.1 0.1 0.1

II-Others 2.9 2.3 1.8 1.3 1.3 1.3

Total Expenditure (A+B) 16.1 17.3 17 16.4 16.9 16.8

Source: RBI, Report on Currency and Finance, Various years.

Here the overall profile of state government finances is examined before focusing particularly on their plan expenditure. As in the case of the central govt. a significant increase took place in total expenditures during the late 1980‟s from a level of about 16 per cent of GDP in 1980-85 to 17.3 per cent in 1985-90 (Table-5 (g) and chart-5.7). This had fallen in 1990s to about 16.5 per cent. Similar to the central government, the main adjustment has been made in capital expenditure, falling continuously from a level of about 5 per cent of GDP in the early 1990‟s, to about 3 per cent now. In the case of the state governments, unlike the central government, capital expenditure fell during the late 1980‟s as well. But just as in the central government, the main problem lies in increasing debt service payments, from only about 0.9 per cent of GDP in the early 1980‟s to about 2.3 per cent now.

Similarly, other committed expenditures such as pensions have also been rising.

The net result is that, with falling overall expenditure and rising „non- developmental‟ expenditures, the state governments‟ ability to invest in

productive activities has been compromised very significantly. It is interesting to observe that, relative to the central govt., States have performed better in keeping up their tax effort. Their own tax revenues have increased marginally from about 5.7 per cent of GDP in the late 1980‟s to about 6 per cent now (Table-5 (h) and chart-5.8 Their share of central taxes has also remained stable. Hence, unlike the central government, they have not suffered from erosion of tax revenues. But it can be argued that, since the service taxes such as sales tax are the responsibility of the state governments, their share should have risen. In contrast, non-tax revenues (user charges + return from state public enterprises) have fallen. The net result is some deterioration in revenue receipts.

Consequently, with a rise in revenue expenditures in the 1990‟s on account of rising debt service and other non- developmental expenditure, states have also recorded increasing revenue deficit in the 1980‟s. This had serious consequences for their ability to sustain plan expenditure.

TABLE-5(h)

PROFILE OF TOTAL REVENUE OF STATE GOVERNMENT. (% OF GDP) Category 1980/85 1985/90 1990/95 1995/99 1997/98 1998/99 (A) Revenue receipts (I+II) 11.5 12.8 12.8 12.3 12.5 12.3

I-Tax revenue 7.6 8.5 8.5 8.6 8.8 8.9

Revenue from state taxes 5.1 5.7 5.7 5.8 6.0 6.0

Share in Central taxes 2.5 2.8 2.7 2.8 2.8 2.9

CHART- 5.7 PROFILE OF TOTAL EXPENDITURE OF STATE

GOVERNMENT

0 2 4 6 8 10 12 14 16 18 20

1980/85 1985/90

1990/95 1995/99

1997/98 1998/99 Years

% of GDP

(A) Revenue expendiutre (I+II+III)

I- Developmental II-Non Development Interests payments & debt servicing

Pensions other expenditure III- other expendiutre (B) Capital Disbursments I-Total Capital Outlay Developmental Non-Developmental II-Others

Total Expenditure (A+B)

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11

II- Non-tax revenue 3.9 4.3 4.4 3.7 3.7 3.4

(B) Capital receipts 4.1 4.6 4.3 3.9 4.2 4.1

Loans from Centre 2.3 2.7 2.1 2.0 2.2 2.2

Recovery of loans 0.4 0.3 0.4 0.3 0.3 0.1

Other receipts 1.5 1.6 1.8 1.6 1.7 1.8

Total revenue (A+B) 15.6 17.4 17.1 16.2 16.7 16.5

Source: RBI, Report of Currence and finance, various years.

8CONCLUSION

We have therefore seen that the current fiscal situation of both the central and state governments is unsustainable and poses a grave threat to economic growth.

The combined fiscal deficit of the centre and the states amounts to almost 10 per cent of GDP (Table-5(i) and chart- 5.9). In other words, the governments of the centre and the states combined are borrowing resources amounting to a 10^th of national income every year, about a half of these resources are being borrowed

to defray current expenditures on items such as wages and salaries. The current trend is such that before long almost all borrowing will essentially finance current expenditure leaving almost nothing for investment. With declining public investment the current pace of increased private investment will also not be sustained. The consequence will be slowing of economic growth, which will itself lead to a further worsening of the fiscal predicament.

TABLE-5(i)

CENTRE AND STATE DEFICITS (PER CENT OF GDP)

Centre 1980/85 1985/90 1990/95 1995/99 1997/98 1998/99(RE) 1999/2000 (BE)

Fiscal deficit 6.3 8.2 6.7 5.8 6.3 6.5 5.8

Revenue deficit 1.1 2.6 3.2 3.1 3.3 3.7 3.0

States (RE) (BE)

Fiscal deficit 2.9 3.1 3.0 3.2 3.6 3.7 NA

Revenue deficit 0.4 0.3 0.7 1.3 1.4 1.6 NA

Note: Not comparable with other years because of change in investment in small savings.

REFERENCES

1. Shetty, S.L. and Menon, K.A. (1980), “Saving investment without growth”, Economic and Political Weekly, May 24 P.185.

2. Rangarajan,C and Kannan,R (1994) : “Capital – output ratios in the Indian economy (1950- 51 to 1989-90), The Indian Economic Journal, july-sept. vol.-42, No.1,p-1

CHART- 5.8 PROFILE OF TOTAL REVENUE OF STATE GOVERNMENT

0 2 4 6 8 10 12 14 16 18 20

1980/85 1985/90

1990/95 1995/99

1997/98 1998/99

Years

% of GDP

(A) Revenue receipts (I+II) I-Tax revenue Revenue from state taxes Share in Central taxes

II- Non-tax revenue (B) Capital receipts

Loans from Centre Recovery of loans Other receipts Total revenue (A+B)

CHART- 5.9

Centre and state Deficits as per cent of GDP.

0 1 2 3 4 5 6 7 8 9

1980/85 1985/90

1990/95 1995/99

1997/98 1998/99(RE)

1999/2000 (BE) Centre Fiscal deficit Revenue deficit States Fiscal deficit Revenue deficit

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12 3. Raj, K. (1983): “Growth, investment and

poverty in the Mid-term appraisal of sixth plan”, Economic and Political Weekly, 18 (47), p.1973.

4. Raj, K.N. (1984): “some observations of economic growth in India over the period 1952-53 to 1982-83”, Economic and Political Weekly, Oct.13, p.1802.

5. Mishra. S.K. and Puri V.K. (2000):

“Agricultural prices and Agricultural Price Policy”, Indian Economy, Himalaya Publication House, New Dehli, P-435.

6. Government of India (2000): Economic servey 2000-2001.

7. Gulati, A (2000): “Millennium Budget:

Agriculture and rural development”, Economic and political weekly, April. 1, p-1143.

8. Mishra. S.K. and Puri V.K. (2000): “Industrial Development During Planning Period”, Indian Economy, Himalaya Publication House, New Dehli P-474.

9. Mishra. S.K. and Puri V.K. (2000): “Industrial Development During Planning Period”, Indian Economy, Himalaya Publication House, New Dehli P-477.

10. Mohan, R. (2000): “Fiscal correction for economic growth: Data analysis and suggestions”, Economic and Political Weekly, June 10, P.2028.

11. Mohan, R (2000): “Fiscal correction for economic growth: Data analysis and suggestions”, Economic and Political Weekly, June 10, p.2031.