Who did well, who did badly?

OKONOMOS

All federal structures face a common standard problem: the uneven impact of any Central government policy on the constituent units of the federation.

So the dexterity with which the Central government is able to ensure balance among the constituent units of the federation is an important element of good governance.

This is difficult at the best of times, but when a coalition consisting of parties with a strong regional base comprises the Central government, the task becomes even harder.

In a recent paper*, Dharmakirti Joshi and Pooja Mirchandani ask if all Indian states have gained from the reforms and what the sectoral growth patterns across them have been.

That is, they are looking for the gainers and losers of the reform process. No clear picture emerges, but what there is, is worth noting.

Partly, the problem is that the results of their labours are not very different from what is already intuitively known.

But it is good to have an empirical backup to the usual set of hunches. The authors have also examined what this means for state revenues.

They find that the performance of industry and services are key determinants of states' own revenue, although backwardness also matters quite a lot.

More importantly, perhaps, they find that contrary to what some other studies have suggested, namely, that Finance Commission transfers had an adverse impact on states' revenue collection efforts, there isn't "any significant relationship between Finance Commission transfers and states own tax revenues in the post-reform era."

This is interesting, inasmuch as it seeks to answer the oft-made criticism that the gap-filling approach has resulted in states not doing what they must to raise their tax-SDP (state domestic product) ratios.

"The strong and positive relationship between states' own tax revenues and the performance of non-agricultural sectors implies that for the richer states which are more dependent on their own revenues, an industrial slowdown can accentuate the fiscal pressures, especially when the expenditures are rigid and the fiscal situation is fragile."

Their analysis has taken into account the initiatives of the Tenth Finance Commission to reward the tax effort in the devolution formula.

Their findings suggest that the role of reform-based incentives in the devolution formula need to be made stronger.

It then turns out that only four states "" Karnataka, Kerala, MP and UP "" have seen an improvement in agriculture. All others saw a deceleration in the growth of agriculture in their states.

Given the need to raise rural incomes, not to mention the stagnation in industrial growth, which depends on rural demand quite substantially, this immediately poses the central issue for economic policy in the next decade.

It is not a new issue. But it is one worth reiterating. It also seems that the Bimaru states have been doing better than commonly believed.

By the end of the 1990s, "Madhya Pradesh had shown acceleration in all three sectors, while Rajasthan has been among the faster growing states over two decades. Uttar Pradesh accelerated in agriculture, but stagnated elsewhere. Three states "" Assam, Bihar and Orissa "" decelerated in all three sectors over the 1990s."

Finally, thanks to the fact that industrial growth came in a single spurt from 1993 to 1997, only the services sector boomed throughout the 1990s (although why that should be so in any causal sense is not clear).

This has had an obvious impact on state government revenues since services go mostly untaxed. Clearly, the most buoyant sector has not been paying its dues.

An important shortcoming of the paper is that it is content to look at the data and do the usual tricks to come out with some results. This needs to be done, of course, but it is not all that needs to be done.

There is a great deal more to these things than the dry (and often inaccurate) data suggest. Papers like this one need just that extra hard work (or a more confident approach) to capture these other things.

*Economic Structure, Growth Patterns and Tax Revenues: Evidence from Indian States, Crisil Centre of Economic Research, Discussion Paper Series, December, Vol. 04 "" 04