Dialogue  July - September, 2002 , Volume 4  No. 1

Commentary on the Fiscal Situation of the North Eastern States
Dr. Jayant Madhab

1. To appreciate the fiscal situation of the North Eastern States, an understanding of the peculiar characteristics of their geography and their economies is essential. Baring Assam and Arunachal for their geographical size and baring Assam for her population, all the States of the North East are small. The smallest in size is Tripura [10,486 sq.km] and lowest in population, according to 2001 census, is Mizoram [891058]. The density of population varies from 13 [Arunachal] to 340[ Assam]. Because of the hilliness of the terrain, cultivable area is very limited. Only 4 per cent of the total area of over 83,743 sq. km in Arunachal is cultivable. Population is scattered, mainly in hill tops. This makes connectivity, in terms of roads, communication, water supply and electricity very expensive. To build a kilometer of road in the North Eastern hills costs almost twice as much as in plains. The linkages the region had with the rest of India during the prepartition era was lost in the post-partition period; and, unfortunately, till today, these had not been built to replace the system completely. Therefore any thing brought from elsewhere in India to the region costs more; and, at the same time, anything produced in the region costs more to sale elsewhere in India. It is worthwhile to remember that several of the states came to the planning process as a state somewhat late; Mizoram as late as 1986.

2. Another important aspect of the NE India is that the Indian constitution provides certain relief to the hill areas [Assam, Manipur and Tripura] and hill States [Arunachal, Meghalaya, Mizoram and Nagaland]. These pertain to land and tax. Land in these areas can not be sold [unless otherwise permitted under certain conditions] to non-tribals; and, income tax is exempted from the tribals residing in the exempted areas. Essentially, there is no income tax in the hill States and hill areas. Only the non-tribals working and doing business in the tribal areas are subjected to tax. Because of the land problem, banking sector finds it difficult to lend to medium and small-scale industrial enterprises.

3. Income wise, North Eastern States have not done well; their per capita Net State Domestic Products [NSDP] are lower than the all India average. Indeed, Assam, the biggest economy in the region, has only 61 per cent of the all India average; and, 41 and 21 per cent those of Maharashtra and Delhi respectively. While, India’s GDP was growing at an average over 6 per cent in real terms, NER states economies were growing at a lesser rate during 1992-99. In a few states high growth was noticeable in some years. This was mostly due to higher construction [mainly roads] activities financed by the Central Government in certain years.

4. At the time of independence only three states were in existence, in what now is called North East: Assam, Manipur and Tripura, the last two being princely States. Later day States Nagaland, Meghalaya, Mizoram and Arunachal were either carved out of Assam or of the administrative set up of Assam. These states were created to fulfill certain ethnic aspirations. Financial and economic viability were not a consideration. It was presumed, and in the case of Nagaland it was explicitly stated that Central Govt. would bear a substantial burden of governance.

5. Last, but not the least, is the fact that Nagaland, Assam, Manipur and Tripura, four out of seven States, are suffering from unprecedented insurgency problem for a long time, which diverts both financial resources and attention from development to control of insurgency. Indeed, it can be argued that much of insurgency in those areas is due to lack of development. Therefore, a vicious cycle is, unwittingly, created. Only recently, the Central Govt. has come forward to rescue those states by sharing the burden of insurgency operations. In addition to all the above, there are frequent natural calamities, largest being annual floods. These states have to cope up with such calamities annually.

6. Owing to the factors discussed above, the tax base of the NE states, baring Assam to some extent, is small. The largest contributor to the Net State Domestic Product of these states is the tertiary sector, which is essentially services mainly dominated by public administration and other services. Except in the case of Assam and to some extent in the plains of Manipur and Tripura, income from those sources does not come under purview of tax net, for reasons mentioned earlier. Similarly, again except Assam, which levies an agricultural income tax, agricultural income is not captured in the tax net. Unfortunately, baring Assam, manufacturing sector is very small. In the secondary sector, it is essentially construction, mainly roads and government buildings, mostly financed by the Central Govt. or its organizations. All these factors contributed to the narrowness of the tax base.

7. Both the Central and the States are suffering from fiscal profligacy in varying degrees. Financial problems of the States have become acute since the implementation of the Fifth Pay Commission’s recommendations. The Centre is also suffering; but, the Centre has more resources to withstand. States have fewer resources; therefore, fiscal problems become more acute.

8. The NE States are no exception to this problem. In fact, two out of seven States are on the verge of bankruptcy. Their revenue resources are not good enough to pay for salaries, pension and to service interest payment. Growth of their revenue is not commensurate with their expenditure. They borrow to meet revenue expenditure and to service debt. More they borrow, higher is the debt. Debt servicing and salaries including pension are increasing every year. They are in a classic ‘debt-trap’ situation.

9. All the NE States, Himachal, Sikkim, J & K and now Uttaranchal are "Special Category States". These States get the Planning Commission’s assistance in the form of 90% grant and 10% loan, as against the rest of the State’s 70% loan 30% grant. This benefit is certainly a big relief for the special category States. In the ease of rural development, Central Govt. funds 75% of the programme and the States have to fund 25%. Since, several of the NE States can not even mobilize 25% of funds, much of the rural development funds remain unutilized.

10. The gross fiscal deficits of all the States are rising. NE States have similarly experienced high deficits. Table 1 shows the trend.

Table 1
Gross Fiscal Deficits of NE States and Some selected States 1998-99 – 2000-01
[Within bracket shows as a percentage of NSDP]                                                         [Rs. Crore]

Data from CMIE: Public Finance 2002 and Economic Survey 2001

11. NE States are facing severe liquidity crisis. Assam and Manipur have not been able to pay the salaries to their employees in time. A critical look at their revenue potential and yield will help in understanding the problem.

12. Because of the reasons cited above, NE States’ own revenue resources [tax and non-tax] form a small portion of the NSDP. The table above illustrates the point.

Table 2
States Own Revenue Sources as a percentage of Net State Domestic Product 1999-2000