The rapid fiscal deterioration was attributed to a number of reasons, common to all states with varying degree. Expenditures on salaries, retirement benefits, and pensions grew rapidly following the implementation of the Sixth State Pay Commission award along the lines of the Central Fifth Pay Commission’s award.<sup>17</sup> Subsidies, particularly food subsidies, grew rapidly (Figure 7). Tamil Nadu’s share in central tax devolution declined further following the Eleventh Finance Commission’s award. Successive Finance Commissions had reduced the share of Tamil Nadu in the devolution of central taxes from 8.05 percent by the Seventh Finance Commission to 6.64 percent by the Tenth Finance Commission, and further to 5.39 by the Eleventh Finance Commission.<sup>18</sup> New borrowing to support the growing revenue deficit added to the debt and interest burden. Finally, growth in contingent liabilities associated with fiscal support to the public sector units, cooperatives, and the statutory boards increased the fiscal risks.

Although these systemic factors were prevalent even before the crisis, the implementation of the Sixth State Pay Commission’s recommendations in April 1998 triggered the fiscal crisis because of the large payouts for back wages and revised salaries. Consequently, the annual, average growth of salary and pension expenditure accelerated from 14.5 percent during 1990/91-1997/98 to 26.7 percent during 1997/98-1999/2000.

**Table 1.  Debt Dynamics – Case of Tamil Nadu (Percent of GSDP)**

||1994|1995|1996|1997|1998|1999|2000|2001|2002|2003|
|---|---|---|---|---|---|---|---|---|---|---|
|Stockofdebt (_b_)|16.6|16.4|16.3|16.3|17.3|20.5|22.2|24.9|28.0|27.8|
|_(A) Actual change in debt (db)_||-0.2|-0.1|0.0|1.1|3.2|1.7|2.6|3.2|-0.3|
|Decompositionofchangeindebt|||||||||||
|(1)Interestpayments(_i_)||1.8|1.8|1.7|1.8|2.1|2.2|2.4|2.7|2.8|
|(2)Primary balance (_x_)||0.2|-1.0|-0.6|-2.3|-2.5|-1.8|-1.1|-1.9|0.3|
|(3) Growth effect(_gb/Z_)||-0.5|-0.7|-1.2|-0.7|-1.0|-1.4|0.5|-0.6|-1.4|
|(4)Inflationcomponent (_πb/Π_)||-1.5|-1.3|-1.1|-1.3|-0.1|-0.7|-0.8|-1.2|-1.2|
|_(P) Predicted change indebt* _||_-0.4_|_0.7_|_0.0_|_2.1_|_3.5_|_1.8_|_3.2_|_2.7_|_-0.2_|
|_(A)-(P) Residual term**_||_0.2_|_-0.8_|_0.0_|_-1.1_|_-0.3_|_-0.2_|_-0.6_|_0.5_|_-0.1_|
|Effectiveinterest cost (% ofGSDP)||0.2|0.5|0.6|0.5|2.0|1.5|1.6|1.5|1.5|
|As apercentage of debt||1.4|2.8|3.7|2.8|11.7|7.1|7.3|6.1|5.4|

*Predicted change in debt is computed by the authors’ following equation (3) as (1)-(2)+(3)+(4).

** Data sources: World Bank and the government of Tamil Nadu. Note: The years shown in the table denote fiscal years, e.g., 1994 stands for fiscal year 1994/95.

> 17 Every 10 years the Indian government appoints a Central Pay Commission which recommends a wage structure for central government employees. States either adopt the Commission’s recommendations to maintain parity with central government pay scales or set up their own individual Pay Commissions that recommend a wage structure for their civil servants after factoring in the Central Pay Commission’s recommendations. The previous state government in Tamil Nadu implemented the award in 1998 with retroactive effect to 1996.

> 18 Constitutionally mandated Finance Commission convenes every five years to determine the revenue sharing between the center and the Indian states. Finance Commissions – from the Sixth to the Eleventh – gave increasing weights to redistributional factors.

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