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States' Fiscal Management and Regional Equity: An Overview - Interstate Disparities

States' Fiscal Management and Regional Equity: An Overview edited by M Govinda Rao and Anwar Shah (New Delhi: OUP), 2009; pp xvi + 290, Rs 695


Interstate Disparities

Upinder Sawhney

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He also looks into the repayment profile of
the states and their access to ways and
means advances as also the experience
with market borrowings. The paper cov
ers a wide array of issues relating to the

he study of subnational economies in a federal nation is important to understand many of the economic, social and political issues of a country. Some meaningful work has been done on state economies in India in the past decade. This book is a timely contribution by M Govinda Rao and Anwar Shah when both the issues of fiscal management of subnational economies and inter-regional equity remain of great significance in India.

The dissimilarity in the capability to manage state finances as well as difference in volume of the inter-governmental transfers in India are the main reasons for the widening gap between the state economies. It is a well-recognised fact that building states’ fiscal capacity can i mprove service delivery, and thereby a ddress some vital developmental issues of the states and lead to reduction of regional imbalances.

Fiscal Reform

The fiscal reform programme of the Government of India, initiated in 1991, has not been implemented with the same amount of enthusiasm and vigour by the central and state governments. This collection of eight papers is divided into two sections, one dealing with the fiscal challenges of Indian states and the other relating to regional fiscal equity.

Economic & Political Weekly

february 19, 2011

States’ Fiscal Management and Regional Equity: An Overview edited by M Govinda Rao and Anwar Shah (New Delhi: OUP), 2009; pp xvi + 290, Rs 695.

Govinda Rao and Partap Jena study the recent trends in state finances using the data of the first decade of this century and bring out the fact that most of the states, in their effort to reduce fiscal deficit, have compressed their developmental expenditure. This has widened the gap between the developed and backward states and the system of transfer of funds from the c entre to the states has not addressed this problem adequately.

Kavita Rao touches upon the relevant issue of reforming the state tax system in the era of globalisation. Having discussed the varied performance of states’ own tax revenue across states, the author highlights the pertinent issue of limitations in the coverage of tax systems, i e, they do not cover the services as the Constitution does not provide for the states to tax services. She also deals with the problems in the implementation of VAT. Hopefully these issues will be addressed when the goods and services tax (GST) is introduced.

Anti-Poverty Programmes

D K Srivastava analyses the debt management in the states including debt restructuring, write off, debt swap and relief, etc.

vol xlvi no 8

debt of the state governments, but it does not reflect any relationship with interstate differences in development. Pinaki Chakraborty and Partha Mukhopadhyay assess the anti-poverty interventions under cooperative federalism, with special reference to the National Rural Employment Guarantee Act (NREGA). They extensively discuss the mechanism of intergovernmental finances in India as well as the i mplementation of NREGA. The discussion brings out the deficiencies in the delivery system of NREGA and other social programmes. The fiscal costs of these are very high, whereas the benefits to the target group leave a lot to be desired. These programmes involve all levels of government in the country, i e, national, state and local, but no level of the government has the capacity to deliver. The paper covers the very relevant issue of anti-poverty programmes, but this is distinct from the overall theme of the book.

In the second part of the book, Govinda Rao touches upon the significant issue of lack of fiscal ability of the poor states to create adequate infrastructure despite i nter-governmental transfers. He points out that the central government’s investments as well as funds of the banking sector are allocated more to the comparatively better-off states than the p oorer ones. This chapter discusses the dis parities in interstate differences in


expenditure on public services over a decade, from 1995-96 to 2003-04. In a globalising world, investments flow to states with good infrastructure and away from the areas with poor quality social and economic overheads. So there is an urgent need for reform of intergovernmental fiscal arrangements for b alanced regional development. In the following article, Govinda Rao and Subrata Mandal have brought out an interesting fact that a number of natural resource-abundant states in India are lagging behind in development because of severe fiscal disabilities which have not been offset by the transfers from the centre. This corroborates the findings of the earlier study that intergovernmental transfer systems need to be reformed to correct the regional imbalances in development. Thus, there is a dire need for coordination between various agencies making transfers from the centre.

Somik V Lall brings out the fact that the service delivery mechanism of local bodies throughout the country is grossly inadequate, but it is even worse in economically backward states like Bihar, Uttar Pradesh and Orissa. This is due to a gross shortage of funds with urban local bodies. He argues that raising local taxes is a more effective way of financing and improving local infrastructure supply as against the transfers from higher levels of government.

The last chapter by Raja Shankar and Anwar Shah discusses the Indian case of regional inequality and the impact of p olicies for regional development. The a uthors have highlighted that regional inequality between Indian states has widened since 1980. They have focused on the impact of implicit and explicit transfers from the government to the states, establishing that implicit transfers have gone disproportionately to richer states and explicit transfers have failed to provide any impetus in the development of poorer states, thus, further accentuating the problem of disparity between the two sets of states. The distinguishing feature of this paper is that it suggests meaningful areas for future research.

To conclude, one can say that this c ollection of eight papers is a cohesive compilation on interstate inequalities amongst the Indian states and their poor fiscal management. This volume fills the gap in economic literature on subnational economies in India in the post-reform period. There are not enough studies on interstate disparities in economic development. This book addresses the issue in a lucid manner. Despite fiscal reforms, there are serious shortcomings in the resource transfer mechanism from the centre to the states. The states are also not making enough of an effort to mobilise their own resources. There is an urgent need for institutional and governance reforms, if the issue of i nter-regional inequity is to be seriously addressed. This book can provide meaningful insights for policymakers, and will be a useful contribution to the literature on contemporary issues of the Indian economy.

Upinder Sawhney (upindersawhney@rediffmail. com) is with the Department of Economics, Panjab University, Chandigarh.

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2011 / 272 pages / C

350 (paperback) 2011 / 300 pages / C
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www.sagepub.inLos Angeles „ London „ New Delhi „ Singapore „Washington DC

february 19, 2011 vol xlvi no 8

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