Measurement Issues in Comparing Fiscal Performance of States

I

Of late the finance ministry (2001, 2002) as well as the Finance Commission (2000) have recognised the need to provide incentives to the states for their fiscal performance and discipline. Any effort in this direction necessarily brings to the fore the question of comparing different states on some well-defined criteria. Out of several indicators of the fiscal performance, fiscal deficit is widely accepted as very comprehensive measure of the fiscal discipline of the government. Since the absolute magnitude of the fiscal deficit depends directly on the size of the state and the nature of the economy, it is invariably considered as a proportion of the income produced in the system. That is how the international fund providers like the Asian Development Bank (ADB) stipulate conditions in terms of achieving the fiscal deficit as a certain percentage of the state income over time to reflect fiscal health of the state economy. Another related aspect of the fiscal performance is the burden of the public debt on the state economy. Again, the absolute magnitude is often misleading because it depends on the size of the economy and its rate of growth over time. Moreover, the amount of public debt and the fiscal deficit are closely related as borrowings represent a pre-dominant source of financing the deficit in the budget. Public debt is, therefore, also considered as a percentage of the state income to reflect the overall fiscal health of the economy. We can see that there are three important aggregates, viz, state income, fiscal deficit and public debt, involved in comparing the fiscal performance of different state economies. Proper concepts and their uniform measurement are the preconditions for attempting any such comparisons. The following sections discuss several issues in the measurement of each of these aggregates providing some illustrative estimates for the Gujarat state.

II
State Income