ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Fiscal Reform


This is with reference to M Govinda Rao's article 'Linking Central Grants to Revenue Deficit Reduction by States' (June 3). One cannot but agree with Rao's suggestion that the centre must reduce its own revenue deficit while seeking the same from the states. Rao, however, seems to have erred in his statistical comparison and inference. At one place he says, "it must be noted that the revenue deficit of the centre constituted almost 4 per cent of GDP in 1999-2000, and aggregate revenue deficit of the states in 1998-99 was about 2.3 per cent of GDP". In a different context, he says, "to be sure, the revenue deficits of the states as a percentage of GDP have shown a steady increase from 2.6 per cent in 1990-91 to 3.7 per cent in 1999-2000". The first statement gives a misleading picture of the aggregate revenue deficit position of the states vis-a-vis the centre and seems to suggest that the centre faces a problem of almost twice the magnitude faced by the states taken together. However, in light of the second sentence quoted which provides the recent data, the problem with the states is of the same magnitude as the centre's, if not worse.

One further point which I would like to mention pertains to the limitations of the Finance Commissions. The Finance Commission, notwithstanding its statutory status, generally acts under the terms of reference set by the central government.

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