states have been more reliant on central transfers, and so they have suffered more from a reduction in these transfers during the nineties.<sup>35</sup> They have also been proportionately harder hit by the implementation of the CFPC award, which began in 1998 in the states.

**Figure 8: Debt stock as a share of GSDP**

<!-- Start of picture text --> 60 5<br>4.5<br>50 4 Debt / GSDP (poor states)<br>3.5<br>40<br>3 Debt / GSDP (other<br>states)<br>30 2.5<br>Interest payments / GSDP<br>2<br>20 (poor states)<br>1.5<br>Interest payments / GSDP<br>1<br>10 (other states)<br>0.5<br>0 0<br>1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05<br><!-- End of picture text --> _Source: Reserve Bank of India (2005) and World Bank States Database_ While, there are signs that fiscal deficits are now coming down significantly, especially in 2006/07<sup>36</sup> , and the debt-to-GDP ratio is stabilizing, the remaining developmental needs also remain huge. Many desirable initiatives have been launched including for rural infrastructure ( _Bharat Nirman,_ NURM _),_ employment (NREGA), education (SSA) and rural health (NRHM). These need to be financed with some combination of higher taxes (or user charges) or lower and restructures expenditures (cutting other existing funding). The 2004 TFC recommendations in particular appear to be already helping to facilitate the development process.

The TFC was given an exceptionally wide remit, in particular coming up with a plan to lower states’ indebtedness and reform the borrowing regime. Its recommendations include a package of interest rate reductions on existing loans from the center and debt write-downs in return for adopting fiscal responsibility legislation and eliminating revenue deficits by 2008/09 while reducing the overall deficit to 3 percent of GSDP (implying that states’ capital expenditure will be 3 percent of GDP).<sup>37</sup> The TFC proposed that the center move to a system of 100 percent grants to the states; the only loans will be the pure pass-through of external assistance. States would have to borrow directly from the market without any cross-subsidy. As a result of the TFC’s proposals, there is a one percentage point increase in total taxes transferred to all states as a share of the government of India’s center’s tax take (from 29.5 percent to 30.5 percent). An even bigger increase is projected in grants: the average annual grant for all states is 143 percent higher during the TFC’s tenure (2005/06 to 2009/10), compared with the previous five-year period (2000–05).

> 35 In poor states central transfers account for half of all revenues, versus about a third in the other states. 36 Early estimates suggest that the consolidated state-level deficit has come down to around 2.5% of GDP in 2006/07.

> 37 The TFC has set up a Debt Relief Facility to replace the Fiscal Reforms Facility. The objectives of the two funds are the same, although the reward is now in the form of debt relief or restructuring rather than the cash grants given earlier.  And the corpus of the Debt Relief Facility is much bigger than that of the Fiscal Reforms Facility, although it is still small relative to the size of the overall debt.

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