Dialogue  April - June, 2004 , Volume 5  No. 4

Fiscal Governance in the Northeast

Dr. Gulshan Sachdeva

To understand the fiscal governance in the North-East, it is necessary to look into the special constitutional arrangements, historical background, geographical location as well as other peculiar features of the region. The region comprises the States of Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland and Tripura, with about 8 per cent of the country's geographical area and about 4 per cent of its population. Their combined contribution to the national economy is around two per cent. Recently Sikkim is also included in the grouping. The region is known for its ethnic, linguistic, cultural, religious and physiographical diversity. Historically, successive legal and administrative decisions taken between 1874 and 1935 gave the areas of the North-East distinct identity. The British administration initially treated the hill areas as a "Non-Regulated Areas", then declared them as "Backward Tract" and, lastly, "Excluded Areas" and "Partially Excluded Areas".

Statistics are available in plenty about the number of races, tribes and their sub-groups, ethnic groups, cultures, religions, languages and dialects spoken in this region but broadly speaking there are three distinct groups of people -- the hill tribes, the plains tribes and the non-tribal population of the plains. The majority of those living in the plains are Hindus and Muslims while a substantial proportion of hill tribes in Meghalaya, Mizoram and Nagaland are Christians. Geographically, apart from Brahmaputra, Barak (Assam) and Imphal (Manipur) valleys and some flat lands in between the hills of Meghalaya and Tripura, the remaining two-third area of the region consists of hilly terrain. Most of this hilly portion is either owned, or controlled or managed, by tribes, clans or village communities. The most populous part is the Brahmaputra valley which constitutes about 22 per cent of the region.

The pace of development in the hill areas and plains differs considerably. The valleys are economically active areas, the Brahmaputra valley being the most active. Tribal populations constitute only about one-fourth of the population of North-East even though in four States — Mizoram, Meghalaya, Nagaland and Arunachal Pradesh — tribals are in majority. In Mizoram, which has one of the highest literacy levels (88 per cent) in the country, second only to Kerala (91 per cent), they constitute as high as 95 per cent of the population.

Due to special constitutional arrangements, historical background as well as geographical location, the central government has been trying to integrate the North-East Region with the national economy through a special policy framework. It has accepted the right of tribals to retain their way of life and identity and has sought to integrate them through democratic means into the federal frame of the Constitution of India.

In the last few decades, various schemes for the development of infrastructure and economy of the North-East region have been formulated. The schemes include the formation of the North-Eastern Council, Hill Area Development Projects and sub-plans, Tribal Area sub-plan, and Tribal Development Agency Projects, Border Area Development Programme, to name only a few. In addition, these States have been declared as Special Category States; they get Central Assistance on the basis of 90 per cent grant and 10 per cent loan. Some public sector units have also been set up in the region. The policies of industrial licensing, concessional finance and investment subsidy, growth centres, as well as freight equalisation of some major industrial inputs have also been used towards economic development. Under the announcement made by the then Indian Prime Minister Mr Deve Gowda in October 1996, all developmental Ministries and departments of the central government have been directed to earmark at least 10 per cent of their annual budget for the progammes in the Northeast. In case any central government Ministry fails to achieve this target, the unutilized 10 per cent portion is pooled in the Non-lapsable central pool of resources which will be re utilized to finance developmental projects in the Northeast. Creation of a separate Department of Development of North Eastern Region (DONER) is another new initiative by the government. Further, to protect tribal interests, policies of less interference with the cultural traditions and customs of the tribal people are being followed and additional political and administrative framework has been provided for the region. Under the Sixth Schedule of the Constitution, the concept of Autonomous District Councils has been applied. The councils are responsible for looking after the social, economic and minor criminal and civil matters of the tribal people.1 

While discussing finances of the North-Eastern States, it has to be kept in mind that many of these States were created mainly to fulfil the ethnic, political and cultural aspirations of the people. During the reorganisation of the States in the North-East, a pertinent criterion was ignored that the territory in question must have revenue resources to meet its administrative and other non-developmental expenditure. It was perhaps thought that with their potentials, particularly in the areas of agriculture, hydro electric power and handicrafts etc., these States would be able to achieve financial viability after help and protection in the initial years. But any form of protection or subsidy has the tendency to be perceived by economic agents as a permanent feature of the system. In due course of time, it creates its own network of beneficiaries and any change in the existing set of rules evokes strong resistance. Creation of smaller states in the region might have been a sensible policy from a larger national perspective. But how and when these States would become financially viable was not clear either to the Central planners or to the State governments. Decades have passed and the economies of the region are continuing to suffer. It seems that both the Centre as well as the State governments of the region have accepted the status quo. The Planning Commission holds routine general discussions with these States year after year. Because Central assistance has been assured they have not made much effort to develop their internal financial resources.2  Since the States do not have to raise internal resources to meet their non-developmental expenditure, there has been a tendency to multiply administrative units and employees beyond reasonable requirements. Their main task seems to be simply to find ways to utilise Central funds in a routine manner. This sort of financial situation is neither desirable nor sustainable.

Major Trends

Even at the national level the fiscal performance of the State Governments as reflected in the movements in the key deficit indicators, viz., revenue deficit, gross fiscal deficit and primary deficit has been an area of concern in the last few years. According to the Reserve Bank of India analysis, many factors have been responsible for the disparity in the growth rates of receipts and expenditure and the consequent widening of the fiscal gap in many of State Governments. These include a growing interest burden, increasing pension liabilities, large administrative expenditure, losses incurred by State Public Sector Undertakings, inappropriate user charges and deceleration in Central transfers. The large revenue deficits have led to higher fiscal deficits and the rise in debt. As a result, a vicious cycle of deficit, debt and debt service payments has emerged. The fiscal stress, in turn, has seriously constrained many of the States' ability to discharge their primary responsibility of developing social and economic infrastructure.3  The situation in the Northeastern States is further complicated because of many additional factors. These include little scope of internal mobilization of resources and large public service employment. In the last few years, more than half of the EXPAND has been on the account of revenue deficit.4  Supreme Court ban on commercial felling of trees and prohibition policy in Nagaland and Mizoram have further restrained the situation. A few states are not even able to pay salaries on time. They borrow further to meet revenue expenditure and service to debt. As a result some of the states are in a typical “ debt trap” situation.5 

The States’ own revenue receipts comprising States’ own tax and non-tax revenues reflects the States’ budgetary flexibility in financing their expenditure. At the national level, the share of States' own revenue receipts as a proportion of total expenditure has remained around 40 per cent in recent years. However, in the Northeast the proportion of State’s own revenue receipts has remained very low. The State-wise position in the Northeast is presented in Table 1. Despite serious fiscal problems the social sector expenditure which includes social services, rural development and food storage and warehousing etc in the region has been quite comparable to other relatively richer states ( table 2).

                                                            Table1 :

                    State-wise position of States Own Revenue Receipts

                                As a Percentage of                       As a Percentage of

                               Revenue Expenditure                   Total Expenditure

                            2001-02  2002-03    2003-04     2001-02 2002-03 2003-04

                                                    (RE)       (BE)                       (RE)        (BE)

Arunachal Pradesh   10.2         15.3         14.3         7.6           10.4         10.3

Assam                     30.7         28.9         27.2         24.6         23.0         22.6

Manipur                    6.0           8.0           11.7         3.8           5.1           7.8

Meghalaya              19.9         18.8         19.9         16.5         14.3         15.2

Mizoram                   5.7           6.9           7.7           4.8           5.4           6.5

Nagaland                  6.9           7.2           9.0           5.0           5.1           6.5

Tripura                    14.1         13.4         14.5         10.4         9.8           10.2

ALL STATES        50.9        51.0            54.3        42.5        40.9        42.6

Source: Reserve Bank of India

                                                                    Table 2:

                                    Social Sector Expenditure in the Northeast

                                                                                                                (Rs. Crore)

                                                                                                                As a % of T

                                                                                                                Total Expenditure

                                2001-02   2002-03   2003-04   2001-02   2002-03 2003-04

                                   (RE)        (BE)          (RE)        (BE)

Arunachal Pradesh        449          510          412         32.5        31.2         28.0

Assam                         3,035       4,151       5,797       35.5         37.1         43.3

Manipur                       550          771          627          26.0         31.3         27.3

Meghalaya                    565         715          870          40.5         37.6         42.1

Mizoram                       542         615          468          40.7         40.9         35.7

Nagaland                      544         644          689          26.9         29.6         30.2

Sikkim                          314         392          391          16.5         17.4         18.0

Tripura                         968         1,071       1,046       39.3         38.8         35.0

All States                  1,31,961  1,48,263  1,63,523      35.0        33.5         33.5

Source: Reserve Bank of India

Three major points about the government finances in the region are worth noting. First, an overwhelming portion of the overall receipts comes from the Centre. As a result dependence on the Central government has been growing. Second, States' own tax revenues are very low, even negligible in some States. Not many serious efforts have been made to increase non tax revenues. Third, non-Plan revenue expenditure is high in most of the States. The share of gross transfers from the Centre to aggregate disbursements has been the highest in Mizoram where the average for years between 1985-86 and 1990-91 was about 95 per cent. During the same period, the average for Arunachal was about 80 per cent. For Assam the average contribution to the budget was about 73 per cent. In the other States of the region, share of gross transfers was more than 80 per cent of total disbursements. The All India average during this period was around 45 per cent. In the initial years of the nineties, these ratios declined in all states except Arunachal. In the last few years roughly half the disbursements in Assam comes from the Centre. In Arunchal, Manipar, Mizoram and Nagaland they are still nearing 80 percent. In Meghalaya and Tripura, the ratios are somewhat lower.

                                                                            Table 3:

                 Central Government’s Contribution to North-Eastern State’s Budgets 1985-2002

                1985-86        1990-91    1995-96   1996-97   1997-98   1998-99   1999-00   2000-01      2001-02RE   2002-03BE

                    to 1990-91    1994-95

                    Average       Average

Arunachal      79.7              86.4         87.5         87.6         84.6         90.3          86.8         74.1              81.9               85.7

Assam            72.5               65.0         68.4         75.3         74.4         67.7         55.9         53.6              46.1              52.8

Manipur         86.6               81.0         79.2         75.8         81.2         87.9         59.7         86.2              80.2               82.0

Meghalaya     86.3              77.4         73.4         80.7         74.4         73.6         66.5         68.2               67.5               69.7

Mizoram          95.2              84.4         84.9         79.6         80.6         81.3         81.4         63.1               78.2               82.0

Nagaland        82.9              75.7         72.6         76.2         77.6         78.5          82.6         75.9              77.8               81.5

Sikkim                                                  31.6          27.7         27.5         27.4         31.0         57.4               68.6               40.2

Tripura           83.2               83.1         89.3          83.8         78.9         82.3         76.4        70.2               65.5              69.2

All Indian      45.3               40.1         39.2          40.4         41.8         38.9         30.7        31.0               33.1               34.3

States             

Source: Reserve Bank of India publications

Devolution and Transfer of Resources

The transfer and devolution of resources from the Centre to States are essentially via three channels. First, there are statutory transfers (comprising tax sharing and grants-in-aid) through Finance Commission recommendations. Second, there are Plan grants through the Planning Commission guidelines. The Planning Commission fixes the assistance to States to carry out their Plans while the Finance Commission determines the assistance required for current account budgetary support. There are also "discretionary" grants through central ministries, primarily for centrally sponsored schemes. There are also some indirect channels, such as loans from the central government and allocation of credit by financial institutions controlled by the central government.

The “mainstream” economic literature on the Northeast generally argues its economy in the context of “neglect “ theory. It is also frequently suggested that to end this neglect, massive developmental assistance from the Central government is required, which in due course would also end discontent, insurgency and terrorism in the region. A close look at the Central government’s transfers to the region however tells a different story. Between 1990-91 to 2002-03, Assam received about Rs 43,000 Crore from the Centre. Arunachal and Manipur received about Rs 9,900 Crores and Rs 11,500 Crores respectively. Meghalaya received about Rs 9,000 Crores and Tripura's share is about Rs 14,000 Crores. Similarly, figures for the same period for Nagaland and Mizoram are about Rs 12,000 Crores and 9,000 Crores respectively. The total figure for the region for these thirteen years is about Rs 1,08,504 Crores. These are gross figures. A portion of that money is also given back to the Central government as repayment on loans and interest payments. Thus the cumulative net devolution from the Centre to the North-East for the period between 1990-91 and 2002-03 is about Rs 92,000 Crores . Only grant portion to the region during these 13 years is about Rs 65,000 Crores. About one-third of this grant went to Assam and the rest was shared among other six States.

Table 4: Devolution & Transfer of Resources from the Centre to NER, 1990-91 to 2002-03

                         1990-91     91-92       92-93       93-94       94-95         95-96         96-97     97-98     98-99     99-00     00-01    01-02     02-03   1990-2003

Arunachal

Gross Devolution  351           415.5      472.3       485.2       553.5        702.9         780.5     822.1     907       954.3       1049    1246.9   1172.6     9912.85

Net Devolution     329.2        385.8       452.9      459.8       543.8         675.9        748.1     782.9     859.4     899.4       985.48 1173.5   1095.6     9391.83

Assam

Gross Devolution 1955.9       1873.13    1874.2    2756.5     2512.1       3002.8       3211.5    3734      3522.4   4261.6     4047.2  4781.2   5541.5     43073.8

 Net Devolution    1399.4       1256.8      1236.8   2046.8      1730.5       2298.5      2416.4    2789.3   2910      3076.4      3207.1 3679.6   4383.8    32431.32

Manipur

Gross Devolution 413.8        430.8        494.3     604.5        541.2        641.9        768        919.5      981       1080.1     1198.3  1753.2    1648.7    11475.32

Net Devolution    388.6        393          418.7      513.6        575.7       613.4        714.3      804.8      849.6    1012        1063     1342.1    1274.8     9964.59

Meghalaya

Gross Devolution 326.1       359.3        388.4      529.3        472.9       571.6        634.15     632.8     741.8     807.6       971.2    1177.6     1281.1    8893.79

Net Devolution    307.2       330.5       363.8       423.6       441.3       537.1         595.99     590.6     694.5     752.9       911.17  1109        1210.2    8267.75

Mizoram

Gross Devolution 355.3       380.3       400.2       487.3       519.1        607           644.3     700.8      726.5     951.4       1084.5  1096.4      1003.5   8956.62

Net Devolution    191.1       366.7       384          471.2       500.3        588.3        621.4     673        694.5     913.5        1046.7  1051.9     951.13    8453.85

Nagaland

Gross Devolution  446.07    509.88      659.09     712.5       596.44      754.9        835.33    955        1170.5   1245.7      1394     1569.9      1598.6   12447.78

Net Devolution    402.06     438.8       444.1       585.8       560.9       725.86      796.6       912.2     940.2     1140.7      1331     1402.9      1502.7   11183.83

Tripura

Gross Devolution 519.5      551.8       592.8       614.3        709.6       883.8       987.8     1065.4     1260.4    1419.3     1499.5     1748.2     1892    13744.32

Net Devolution    477.98    506.2     540.6       563.2        656.1         833.9     932.7       1001.1     1183.3    1325        1392.1     1627.4     1756.7  12796.27

NER total

Gross Devolution 4367.7    4520.7     4881.3     6189.6    5904.8       7164.9     7861.6     8829.6      9309.6   10720      11244      13373  14138       108504.5

Net Devolution   3495.5     3677.8     3840.9     5064      5008.6       6272.9     6825.5     7553.9      8131.5    9119.9     9936.5     11386  12175      92489.44

Source; Author’s calculations based on Reserve Bank of India and CMIE data.

Table 5:

Central Grants to North-East, 1990-91 to 2002-03

                          1990-91       91-92      92-93      93-94      94-95      95-96      96-97      97-98      98-99      99-00      00-01      01-02      02-03       1990-2003

Arunachal Pradesh  232.7          295.0      328.9      39.7        387.5     540.5      556.4      528.8      579.9      598.3      915.1      1063.3      988.6      7354.7

Assam                 591.3          1112.1     1045.2    1578.3     1182.2    1424.2    1591.2    1587.2    1722.7     1722.5    2018.2     2741.5     3229.9     21546.5

Manipur               242.9          282.1      284.5      370.5       336.8     452.5      502.9       475.9     502.8       599.4     790.3      1108.1     943.9       6892.6

Meghalaya            217.9          233.3      240.6      296.6       290.8     391.0       388.1      306.6      392.3      415       762.7       928.8      987.2       5850.9

Mizoram               225.9          248.7      244.3      324.3      339.6     452.1       432.7      419.8      409.5      576.5     895.2       918.5      809.3       6296.4

Nagaland               248.7         304.7      296.6       415.9      349.9     527.8       526.8      495.0      518.3     543.4     1236.9      1271.6    1358.2     8093.8

Tripura                 294.9          327.9      334.5      361.2      425.9     622.5       608.9      545.8      682.4     731.0     1181.7      1373.6     1500.0    8990.3

Total                  2054.3       2803.8       2774.6     686.5      3312.7   4410.6     4607.0     4359.1    4807.9   5186.1    7800.1      9405.4    9817.1    65025.2

Source; Author’s calculations based on Reserve Bank of India and CMIE data.

The Way Ahead

While looking at the state level finances in the Northeast, it is clear that the State governments have failed to develop their own financial resources. Increasingly the States are becoming more and more dependent on the Central government. The economic structures of these economies is such that they are underdeveloped agrarian societies with very weak industrial sectors and inflated service sectors . During the liberalisation phase in the nineties, while the national economy was growing fast, the economies of the region were slowing down. In the last few years the gap between national growth rates and regional growth rates has further widened. Assam, the largest economy of the region is in a very critical state, both in agriculture and industry. In the decade of eighties, the average rate of growth Assam was more than 4 per cent. In the nineties, it has grown at a much lower rate. Slow down in growth rates has further restrained fiscal situation in almost all Northeastern states, particularly in Assam..

All the northeastern states will have to make serious efforts to increase their tax bases. The potential areas to broaden their tax base are sales tax, revenues from irrigation and better realisation of taxes from power and transport. The growth of non-plan revenue expenditure has been high in the region but recently there has been an effort by some of the States to keep it under control. Another area of reform would be privatization or closure of most of the public sector units particularly in Assam.

It seems that the present financial situation of many North-East States is not sustainable even in the medium run. So one way out would be increases in the central funding. However, in present circumstances this looks highly unlikely. Only way out could be cutting expenditure and raising internal resources. This needs good fiscal governance by States of the region. A few states including Assam have already entered MOUs with the union Finance Ministry of fiscal reforms to avail immediate help. Recent State budgets in all the states have proposed many fiscal reforms. Arunachal and Assam have also constituted their own State Electricity Regulatory Commissions respectively. These steps indicate some seriousness on part of policy makers. Now the time has also come when the income tax for the tribals in the region could be introduced. This will give a signal of the beginning of a new era.

1.  For details see Gulshan Sachdeva, Economy of the North-East: Policy, Present Conitions & FuturePossibilities ( New Delhi: Konark Publishers, 2000).

2.  These points are also raised by L P Singh, " National Policy for the North-East" in Upinder Baxi , Alice Jacob and Tarlok Singh, eds., Reconstructing the Republic, (New Delhi: Har-Anand, 1999).

3 State Finances: A Study of the Budgets 2003-04, ( Mumbai: Reserve Bank of India).

4 Nedfi Databank Quarterly, vol.2, issue 2, 2003.

5. Jayanta Madhab,” Commentary on the Fiscal Situation of the North Eastern States” Dialogue, vol 4, no. 1, 2002.