Political Economy of Poverty Eradication in India and Essays on Fiscal Reform


Raja J Chelliah

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    Dedication to SITA, MASIL AND SHOBHANA

    List of Tables

    • 1.1.1 Growing Economic Disparities among the Major States 5
    • 1.1.2 Economic and Social Development Indices of LGS and FGS 8
    • 1.1.3 State-wise Indices of Social Development 11
    • 1.4.1 Alternative Projections of Population and Per Capita Income 31
    • 1.6.1 Modified Gadgil Formula 38
    • 1.9.A-1 Agricultural Productivity of Selected Crops in Bihar 58
    • 2.2.1 Fiscal Deficit (FD) and Revenue Deficit (RD) of the Centre and States 85
    • 2.2.2 Proportion of Tax Devolution in Gross Taxes of the Centre and of Total Transfers in Gross Revenues of the Centre 92
    • 2.3.1 Tax Revenues of the Centre and the States: Raised and Accruals 99
    • 2.3.2 Revenues of the Centre and the States: Raised and Accruals 101
    • 2.3.3 Relative Shares of States in Devolution from the Central Government Recommended by the Finance Commissions 106

    List of Abbreviations

    BEPBihar Education Project
    CGCCommonwealth Grants Commission
    CIIConfederation of Indian Industry
    CSOCentral Statistical Organisation
    CVCoefficient of Variation
    DBMDeclining Balance Method
    DPEPDistrict Primary Education Project
    EPWEconomic and Political Weekly
    FDFiscal Deficit
    FGSFaster Growth States
    FICCIFederation of Indian Chamber of Commerce & Industry
    GDPGross Domestic Product
    GINIGini Coefficient
    GSDPGross State Domestic Product
    GSTGoods and Service Tax
    HDIHuman Development Index
    IBRDInternational Bank for Reconstruction and Development
    IDAInternational Development Agency
    IMRInfant Mortality Rate
    KTFKelkar Task Force
    LGSLow Growth States
    MSMahila Samakhya
    MSEMadras School of Economics
    NDANational Development Council
    NGOsNon-government Organisations
    NREGSNational Rural Employment Guarantee Scheme
    RBIReserve Bank of India
    RDRevenue Deficit
    SPVsSpecial Purpose Vehicles
    UNDPUnited Nations Development Programme
    URPUniform Recall Period
    VATValue Added Tax
    VECsVillage Education Committees
    VSSVidyalaya Shiksha Samitis


    I feel honoured to write the foreword to Political Economy of Poverty Eradication in India and Essays on Fiscal Reform, a posthumous offering by Dr Raja J. Chelliah. The manuscript though completed before his death, could be published only now. This book makes an effort to unravel the working of Indian political economy and explores the underlying causes for persistent poverty and low levels of well-being in spite of significant economic growth.

    India has been enjoying strong economic performance for the last few years and the current economic indicators show that the country is at the threshold of becoming one of the largest economic powers in the world in the next two decades. Although poverty eradication and balanced regional development are high on our agenda, we have not fully succeeded in achieving these objectives.

    This book argues that apart from slow growth and the persistence of poverty, the old traditions and structures have continued in tact for long in the country. The masses have remained weak, uneducated and unable to form independent political judgments. Economic backwardness ‘which prevents imbibing of modern education’ also perpetuates social backwardness.

    To overcome these, Dr Chelliah suggests a four-pronged approach of universal education, scientific outlook, political transformation and ethical transformation. He also suggests a set of innovative policies for accelerating growth in the low growth states such as setting up of special purpose vehicles to undertake large scale investments in those states, remodeling the Plan assistance system, accelerating land reforms and utilizing the support of the civil society groups.

    The book also includes some of Dr Chelliah's earlier writings on fiscal federalism and tax reform.

    I am sure that this book will be of use to policy makers, government agencies, academics, NGOs and other stakeholders interested in the field of poverty reduction and inclusive growth.

    A Tribute to Dr Chelliah

    It was for me a great opportunity and a privilege to work closely with Dr Raja J. Chelliah since 1977 soon after he had come back from the International Monetary Fund (IMF). Among a number of economists who have had the opportunity of being associated with him, I am one of the few who had the rare privilege of working with him both at the National Institute of Public Finance and Policy (NIPFP) and at Madras School of Economics (MSE), the two institutions that Dr Chelliah had toiled hard to develop and lead to a position of eminence. Even up to the very last days, he was working tirelessly. The present volume is the outcome of a Foreword, a lifetime involvement with India's economic welfare, a distillation of long years of experience with policy making and interaction with policy makers and an expression of an incomplete journey where even after achieving the status of an economic super power in the global arena, India continues to co-exist with sprawling regions of abject poverty. It was Dr Chelliah's desire that this work be published and it is by way of introducing the reader with the person that Dr Chelliah was and the way his thoughts evolved, that I am writing this introduction as my tribute to a life of an unending involvement with India's economic story where many of the policy chapters were personally written by him.

    Dr Chelliah: Homecoming in the Seventies

    In 1975, when Dr Chelliah came back from the IMF with a view to finally settling down in India, he saw, in the field of work closest to his heart, namely, India's tax system, a highly distorted structure of taxation that was characterised by high and multiple tax rates, extensive tax evasion, high compliance costs and low tax buoyancy. While public finance was being taught in the conventional manner in many of the university departments, there was no dedicated institute conducting advanced research in public finance. In fact, Mr C. Subramaniam, the then Union Finance Minister, during one of his visits to the US had met Dr Chelliah and asked him to consider returning back to India and setting up a research institution specialising in public finance. Dr Chelliah had readily agreed so as to resume his earlier passion of teaching, training and research in public finance while bringing about changes in fiscal policy.1

    As with many other aspects of Indian economic policies, he considered the management of India's public finances, particularly, its tax system quite ‘irrational’.2 Being pragmatic as he was, he realised that reformation of the tax system is must and was going to be a long haul. Given both the political climate and bureaucratic inertia, it was going to take a sustained and well considered strategy to make an effective breakthrough. He needed a strong body of research that can systematically and methodologically assess the defects and deficiencies of the system; he needed to be heard in the relevant policy arenas and he needed to come up with rational, theoretically sound and implementable alternatives. He realised that while the system needs to be overhauled, changes can only be incremental if they were to be acceptable. Yet, each step towards change must be a key constituent of an overall design.

    For achieving this end, setting up the NIPFP in New Delhi was a master stroke. Through this institution, which had small beginnings in two rooms in one of the corridors of the Ministry of Finance, he gathered around him a body of researchers, personally supervising the selection of each one of them. The setting up of the NIPFP brought out another great aspect of Dr Chelliah's personality, namely, his vision and ideas about the way research and academic institutions should be nurtured to serve the cause of unbiased and in-depth research geared to make salient contributions to the country's welfare. Dr Chelliah knew that three things are a must: he must never concede to any pressures from political or bureaucratic sources to compromise on appointments; he must provide to the young economists who were getting attracted to join him in his endeavour, the right atmosphere for work and he must expose them to the best brains from abroad and India both in terms of access to their work and opportunities for interactions.

    From the two rooms of the Ministry of Finance, NIPFP first moved to two floors in the commercial multi-storeyed settings of Rajendra Place in the Karol Bagh area of New Delhi. Within that small place, Dr Chelliah built up a very attractive library and exposed many of those who were fresh from their Ph.D.s from abroad to one of the best up-to-date collection of works in Public Finance. Even in the small confines of NIPFP's Rajendra Place office, he exposed us to some of the most accomplished economists, including William Baumol explaining to us his ‘theory of superfairness’ or Nick Stern explaining finer details of the ‘theory of optimal taxation’ for five consecutive days. NIPFP had already started working for some of the key policy institutions. Among the Finance Commissions, the first round of research support from NIPFP was given to the Seventh Finance Commission. From then on, virtually without exception, NIPFP has provided research support to each successive Finance Commission. In the Ninth Commission, Dr Chelliah himself became the Economist Member and Dr Govinda Rao provided valuable support as the Economic Advisor. Later, Dr Amaresh Bagchi from NIPFP became the member of the Eleventh Finance Commission, myself, of the Twelfth and Dr Indira Rajaraman of the Thirteenth Finance Commission. Dr Rangarajan, who was at that time the Chairman of NIPFP, became the Chairman of the Twelfth Finance Commission. While economists may reflect in due course the value of the institutional contribution of NIPFP in the working and recommendations of one of the most eminent constitutional bodies in India, that is, the Finance Commission, it is easily noticeable that from the time of the Seventh Finance Commission, the methodological framework and orientation of the fiscal transfers from the central to the state governments became more objective and explicit. The methodology became progressively more comparable to similar methodologies of fiscal equalisation prevalent in major systems of fiscal transfers such as Canada or Australia and the orientation became more equity oriented without compromising on efficiency.

    Authoring India's Tax Reforms

    The concern with equity and efficiency also became the key factor in Dr Chelliah's approach to tax reforms in India. The first concrete opportunity came when Dr Chelliah became a member of the Indirect Tax Reforms Committee headed by Shri L. K. Jha (1976–78). The idea of a manufacturing value added tax (VAT) (later to be known as MANVAT) was floated at the time. NIPFP had started systematically examining sales tax systems of one state after another, recommending rationalisation of tax structures, reducing the number of tax categories, reducing multiplicity of levies on the same value added space and highlighting policy changes to reduce tax evasion. NIPFP similarly researched the core central taxes, including central excise duties and the customs duties. Although it has taken quite some time for India to move towards a comprehensive VAT and the process is not complete yet, Dr Chelliah's imprint in that thought process was quite unmistakable.

    Both direct and indirect tax systems suffered from major infirmities and distortions. In the case of direct taxes, there was a reliance on high marginal tax rates, large number of rate categories, many exemption categories and complicated rules that left scope for discretion and evasion. In the case of indirect taxes also there was a complex structure of taxation with both the centre and the states entitled to taxing the production and sale of goods separately resulting in extensive cascading of taxes. Service tax was conspicuous by its absence. There was a limited taxation of some services although called by other names. The tax structure fragmented the domestic market. The central government relied heavily on the central excise duties and customs duties for raising its taxes. The state governments had heterogeneous sales tax structures and they merrily engaged in revenue-depleting tax competition. The existence of a central sales tax provided a barrier to achieving a common market and provided an avenue for tax exportation as well as tax evasion. Since inputs as well as outputs were taxed by multiple jurisdictions, there was extensive cascading of taxes. Dr Chelliah was a skillful negotiator. That is an important reason why many of his recommendations got converted into actual policies.3

    The major opportunity to usher in effective tax reforms in India came Dr Chelliah's way, when, in 1991, he was appointed Chairman of the Tax Reforms Committee of the Government of India. The time was opportune with Dr Manmohan Singh at the helm of the economic and fiscal affairs of the country as the Union Finance Minister. He knew Dr Chelliah closely and had complete faith in Dr Chelliah's ideas about a rational tax system and his capacity to deliver rational and implementable changes. Reforms were in the air. The industrial policy and the exchange rate policy had already been drastically reformed. It was the turn of India's taxation policy. Dr Chelliah seized the opportunity with fervour. In a series of reports, the Tax Reforms Committee produced a set of wide-ranging recommendations aimed at changing the entire landscape of taxation in India. Changes began to happen following the basic philosophy and approach enunciated by the Tax Reforms Committee deliberating under the guidance of Dr Chelliah. Both personal and corporate income tax rates were drastically reduced. The number of rate categories was also substantially reduced. The Central excise duties remerged under the name of Modified Value Added Tax (MODVAT), following progressively more, the basic VAT principle. After the turn of the century, the strategy of reducing tax rates began to pay off, especially in the case of direct taxes, with support from extensive computerisation and reduction in the compliance costs of the tax assessees. The tax revenue buoyancy increased dramatically even while the tax rates were lowered.

    By the late 1990s, the move towards a VAT started gathering momentum. Among taxation systems relating to goods and services, the VAT has come to enjoy an overwhelming popularity in the world. Over 140 countries across the world today have adopted a VAT. The critical challenge was to bring the state governments on board. VAT is a multi-stage levy imposed on business at all stages of production and sale of goods and service. The tax paid at the earlier input stages is rebated at each successive stage creating a chain of verifiable information. The consumer or the final user ultimately pays the tax on his purchases. As such, the VAT is essentially a retail sales tax. The popularity of VAT arises from some of its well known advantages. First, because of its broad base, it has high revenue buoyancy. Second, VAT is also known to be neutral in its impact on foreign trade flows. Exports are generally not taxed under VAT and imports are taxed at the same rate as domestically produced goods. Third, emphasis on domestic consumption taxes in the form of VAT also reduces the fiscal cost of trade liberalisation. Fourth, since the tax is paid by customers in small amounts, it has low visibility once it is established.

    Adopting VAT in a federal country, however, raises additional problems. The different tiers of government in a federal set-up often lead to a dual or concurrent form of VAT. There is then a need for coordination among the governments and arrangements for input tax credit where inter-state sales are involved pose additional complications. But many federal countries had already moved to VAT. In Brazil, which is a federal country, a full-fledged VAT was brought in the mid-1960s. In the European countries, VAT has operated since the 1970s. India has been lagging behind.

    In implementing VAT in India, there were additional difficulties because the division of tax powers between the central and the state governments is constitutionally entrenched making it difficult to bring so many governments on board for a coordinated and harmonised VAT system. Dr Chelliah knew that without the states, a full-fledged VAT in India would remain a dream. He initiated the necessary steps when he became the first Chairman of the Empowered Committee of the State Finance Ministers. At that time, its secretariat was at NIPFP. Dr Ashim Dasgupta was one of the members, representing West Bengal. By the time Dr Chelliah relinquished his association with the Empowered Committee, he had converted Dr Ashim Dasgupta to the cause of a comprehensive VAT for India. Although the task is yet to be completed, Dr Dasgupta, as Chairman of the Empowered Committee is today one of the most ardent advocates of a comprehensive Goods and Services tax in India, the implementation of which now appears round the corner.

    I remember how Dr Chelliah used to discuss and reflect with one of his closest colleagues and confidantes, Dr Amaresh Bagchi, whether anything significant has been achieved through all these long years of struggle to bring sanity to the highly distorted and irrational tax regime that they had started examining in the 1970s. Their view was that although something has been achieved, much remained to be done. Dr Chelliah wondered whether he would see all the required changes happen in his lifetime.

    Reforming India's Fiscal Transfer System

    Dr Chelliah made a salient contribution to every major aspect of Indian Public Finance. One important area was the working of fiscal federalism in India. In the sharing of resources between the central and state governments through tax devolution and grants, the emphasis since he got involved in the framing of the terms of reference as also as a member of the Ninth Finance Commission, shifted to a ‘normative’ approach away from the so-called gap-filling approach. This was meant to provide better incentives to the states for improving their tax effort and managing their expenditures better without apprehending that they will be penalised for better fiscal management which may actually reduce their resource gaps. The reference to a ‘normative approach’ appeared for the first time in the terms of reference of the Ninth Finance Commission, and to our knowledge Dr Chelliah who was also a member of the Planning Commission at that time had provided the necessary inputs for the drafting of the terms of reference (ToR) for the Ninth Finance Commission.

    Another significant contribution in the field of fiscal transfers, which had roots in Dr Chelliah's thinking, was the replacement of the old tax-by-tax approach of tax-sharing to global sharing of all central taxes with the states. This idea finally led to the recommendation of the Tenth Finance Commission regarding an alternative scheme of devolution, which was finally accepted, as a result of which we have moved to a system where all central taxes are shared with the state governments. This was brought about by the 80th Amendment to the Constitution (May 2000, but effective from 1996–97), which provided that the net proceeds of all union taxes and duties except central sales tax and consignment tax, surcharges on central taxes and duties and earmarked cesses, are distributable between the centre and the states. As enunciated by the Tenth Finance Commission, this change facilitated tax reforms among other benefits.

    Structure of Government Expenditure and Debt Sustainability

    In two other areas of public finance, namely, the structure of government expenditure and management of public debt, again Dr Chelliah made salient contributions.4 Up to the late 1980s, the idea of ‘fiscal deficit’ was not in vogue in India. People talked about deficit financing and considered borrowing as if it was a resource and only that portion of expenditure that could not be financed by budgeted tax and non-tax revenues, or borrowing was a problem as it implied borrowing from the central bank. Dr Chelliah began to emphasise that excessive borrowing whether from domestic or external sources or from the central bank has serious implications for sustainability of debt and the burden of interest payments would either lead to additional borrowing or will alter the structure of expenditure. It was only in the early part of the current decade that the concern with fiscal deficit led to the enactment of fiscal responsibility and budget management legislations by the central and most of the state governments.

    While at NIPFP, Dr Chelliah wrote one of his last papers on the subject of expenditure, arguing for a reorientation of expenditure towards health and education5—a theme which was later picked by a number of experts.

    Fiscal Policies and Environment

    One critical aspect of the human condition relates to the environment he lives in. Fiscal policies have a crucial role in the management of environment through incentive-based responses that can be generated through taxation of polluting goods. This was a subject that Dr Chelliah particularly focused on when he had moved to Chennai and he started working with Professor U. Sankar, an eminent econometrician and expert in trade and environment issues, and other colleagues.6 To our knowledge, this is the first comprehensive work on environmental taxes in India where concrete suggestions were made for taxing some of the most polluting inputs and outputs in India, including coal, automobiles, paper, detergents, pesticides, fertilisers, plastics and lead acid batteries. Pollution has serious implications for sustainability of growth, but an important consideration was its asymmetric effects on the poor who are the most exposed to pollution and have the least capacity to cope with the health hazards that result from it.

    India's Poverty: A Life-Long Concern

    Dr Chelliah had become more reflective, more reminiscent in the later years at MSE. Irrationality of the tax system or the deficiencies in the management of government finances was only a reflection of a more widespread malaise of the society. The society at large needed to be reformed. One of Dr Chelliah's lifelong concerns was the eradication of India's poverty. Every policy reform that he was contemplating had to be finally considered in his mind in terms of its impact on India's poverty. Among various eminent economists of the time grappling with this issue, two features of Dr Chelliah's approach to the subject made his thinking quite distinctive and appealing. One, he thought about poverty always in terms of a spatial dimension. Second, he was willing to trade-off a little of growth to make a major impact on poverty reduction.

    It was from the mid-1990s that his concern became far more focused on poverty eradication. Probably it was the realisation that while the growth rate had picked up by the mid-1990s and was averaging above 7 per cent per annum (p.a.), the dent that it was making on poverty was quite limited. He also saw that while the southern and western states were doing well, participating better in the growth process and had more effective policies put in place for education, it was the central, northern and eastern regions that were missing out both in growth performance and poverty reduction. Directing investment in these regions may involve sacrificing a little of efficiency and aggregate growth of the Indian economy, but unless the sprawling regions of Uttar Pradesh, Madhya Pradesh, Bihar and Orissa were brought on board, the impact of growth on poverty was going to be always limited.

    His first published work on poverty was a volume co-edited with Dr R. Sudarshan under the title of Income Poverty and Beyond. During many one-to-one sessions of discussions with Dr Chelliah, he elaborated, while writing his latest essay on poverty eradication that is the main essay of the present volume, exactly what was needed to usher India to the status of a modern economy. Among various words used in the literature on poverty like poverty amelioration or poverty reduction, Dr Chelliah preferred the strongest word, that is eradication of poverty altogether. It also therefore becomes the most demanding task. To achieve this end, Dr Chelliah used to speak of four pillars of modernisation of India.

    Dr Chelliah considered India's continuing poverty as a policy failure that was organically linked to the working of the democracy where, for short-term populism, policies that were necessary but benefitted only after a period were being ignored. Politicians remained focused on short-term gains and indulge in competitive populism. This, he argued, led to preference by the leaders for policies which, with a focus on short-term benefits, could not lead to eradication of poverty that required a long-term strategy and perspective.

    The major proposition that Dr Chelliah puts forward is that for the right policies to emerge from the political process, the electorate has to undergo a process of modernisation. This modernisation was particularly needed in the regions of the low growth states (LGS). In the advanced states, in his view, a degree of social and political transformation of the electorate has already taken place.

    There are four modernisations that Dr Chelliah speaks of. The first is the achievement of universal education which lays the foundation for building up an enlightened electorate and for raising a qualified workforce. The second modernisation relates to the development of a scientific outlook, which leads an individual to seek to understand natural events in the universe on the basis of reasoning, observations and propositions verifiable through experiments. Such an outlook will get rid of superstitious and unverified beliefs and enable a society to achieve technical progress leading to manifold rise in productivity.

    The third modernisation relates to political transformation involving the realisation that human relations should be governed by laws passed by a just government and based on ethical principles upholding the equality of all individuals, individual freedom within the bounds of law and a socially accepted need for protecting the weak and the helpless.

    The fourth aspect of modernisation relates to ethical transformation or the evolution of a social conscience. In Dr Chelliah's view, it is only when the society evolves, income grows, knowledge spreads, the masses and women acquire strength and a realisation grows that civilised behaviour includes socially beneficial conduct and adherence to the principles of justice and equality.

    Building Institutions: Madras School of Economics

    By the mid-1990s, the National Institute of Public Finance and Policy (NIPFP), New Delhi was already well established. Being himself a teacher for long years in his career, Dr Chelliah had wanted to set up a teaching and research institution. He recognised that regular departments of economics in the universities had fallen way behind the pace with which developments were taking place in economics. They were also short of research funds and adequate facilities for processing data and information. Universities in the South were also no exception to this trend. Dr Chelliah began to actively think about setting an institution that could excel in both teaching and research and he wanted it to be established in the South so that a major gap could be filled up. As always, he meticulously thought about it consulting economists, academicians and industrialists. He had also consulted Dr Manmohan Singh who must have encouraged him. The Government of India gave a capital grant of Rs 3 crore as seed money and the Government of Tamil Nadu gave about three acres of land. This combination facilitated the setting up of Madras School of Economics in Chennai, which was established as a registered society for the cause of furtherance of education in India focused on economics. He had some of the most eminent economists associate themselves with MSE, including Dr K.L. Krishna and Dr Kaushik Basu. Although the society was registered in 1993, Dr Chelliah himself moved to Chennai with a view to settling down in 1998. The first batch of students from MSE passed out in 2000. Initially, only a post-graduate diploma was offered. After that, in collaboration with Anna University, MSE started an M.Sc. programme in Economics. Later in 2007, it also introduced an M.Sc. in Financial Economics, and in 2008, a post-graduate diploma in Actuarial Economics.

    Throughout this period, Dr Chelliah, in spite of his failing health, attended office regularly and was always available for guidance and consultations. MSE was and continues to be a unique experiment. Since MSE does not get or ask for recurring grants from any sources, its faculty has to earn the income through its services of teaching and research. Since student fees continue to be highly subsidised, it is only endowments and current projects that must finance all the recurring activities as also the development expenditures as MSE is steadily expanding. This keeps the faculty on its toes. For the selection of faculty as also in its teaching programmes, Dr Chelliah realised that without adequate quantitative skills, it will not be possible to keep up with or contribute to modern economics or policy making. But from the very beginning, Dr Chelliah had emphasised that no faculty member should be overburdened with either too many classes or too many projects. The implementation of this idea has yielded rich dividends in terms of the number and quality of research studies undertaken and publications by MSE faculty. Both in NIPFP and at MSE, Dr Chelliah emphasised that for a modern economist, three things are of vital importance: a modern library, access to a state-of-the-art computer lab supplemented by versatile software, and most important of all, an ambience where economists can interact with each other on both theoretical and empirical problems. Dr Chelliah succeeded in his effort to build MSE where these ingredients became available.

    Maintaining Dr Chelliah's Legacy

    Listening to Dr Chelliah in numerous seminars, lectures and conferences, one was amazed by the clarity and articulation with which he was able to put an idea across. In many seminars when he was presiding over a session, his concluding remarks were a treat to learn from. He was able to assimilate and often resolve apparent conflicts in ideas of the participants effortlessly adding something of value whenever he spoke.

    Dr Chelliah was very fond of English and Tamil literature. When he started out in his career, he wanted to be a writer. One of the favourite readings of Dr Chelliah was Omar Khayyam. Often he used to cite from Fitzgerald's translation of Khayyam:

    Myself when young did eagerly frequent Doctor and Saint, and heard great Argument About it and about: but evermore Came out by the same Door as in I went.

    There were moments, when he used to wonder whether all the hustle and bustle of life goes to add anything of significance and whether, for all the work that he did, it really made a difference.

    For an ordinary academician, it is not easy either to emulate Dr Chelliah's achievements or live up to his legacy. The country recognised his contribution by eventually awarding him the Padma Vibhushan7 in 2007. His life in many ways is his message. In spite of having worked closely with many powerful politicians and bureaucrats of his time, he remained a teacher and researcher to the very end. He was pragmatic and yet a visionary; he was rigorous in his approach and yet evolved sound, practicable policies, and in spite of growing years, remained young in his thoughts and liked to be surrounded by young students, who he thought are India's hope.

    His message to the contemporary generation was ‘I have hope in the younger generation who have modern ideas… I feel the next 25 years are very crucial’. They will have to live up to a demanding legacy.

    D.K.SrivastavaDirector Madras School of Economics

    1. Dr Chelliah took his Masters degree from Madras University and lectured for five years at Madras Christian College. He went to the USA on a Fulbright scholarship and obtained his Ph.D. in economics at the University of Pittsburgh. He returned in 1958 and joined the National Council of Applied Economic Research as a Senior Economist. In 1961, he taught at the University of Rajasthan as Reader, and in 1966, was Professor of Economics at Osmania University. He joined the International Monetary Fund as Chief of the Fiscal Analysis Division in 1969, a position that he held for six years.

    2. The title of a paper by Dr Chelliah, written later in 2001, was ‘Rational Ways of Increasing Tax Revenues in India’, which he presented at the Conference on Inter-Governmental Fiscal Transfers for Equitable In-country Growth, organised by the Asian Development Bank in New Delhi.

    3. The citation of the Financial Express Award that he received in 1997 recognises this: ‘Any description of Dr Chelliah must recognise his enormous and patient negotiating skills which enable him to gain acceptance of his ideas. One example is his gaining the agreement of state governments to a uniform rate of sales taxes on a range of products’.

    4. A memorable contribution on the subject was the Kale Memorial Lecture that he delivered in 1993 at the Gokhale Institute of Politics and Economics, Pune entitled ‘An Essay on Fiscal Deficit’.

    5. This report was entitled ‘A Framework for Restructuring Public Expenditure’ prepared at NIPFP in 1996.

    6. This work was published under the title ‘Ecotaxes on Polluting Inputs and Outputs’ with U. Sankar, Paul Appasamy and Rita Pandey as co-authors by the Academic Foundation, New Delhi in association with Madras School of Economics.

    7. Dr Chelliah received several awards in recognition of his contributions. In 1989, he was given the National Citizen Award for orienting the country's planning to benefit the weaker sections. The award was presented by Shri Rajiv Gandhi. In 1993, the University Grants Commission's Swami Pravananda Award in Economics was given to him. He was honoured with the Batheja Memeorial Trust Award for his book: Towards Sustainable Growth: Essays in Fiscal and Financial Sector Reforms in India adjudged to be the best book written on Indian Economic Development in 1996 and 1997. In 1997, he also was given the ‘Financial Express Award for Economics’. The Governor of Orissa presented the Lifetime Achievement Award orgainsed by the Alpha Arts and Science College in Chennai in 2002.


    For some years now, some of us working on the problems of lagging states have been witnessing these constituencies forming combinations with political forms and these formations being quite powerful in some places but also often just formal. Nevertheless, a fully analytical study of the interaction of the forms of political economy and studies that represent democratic forms generated by the Indian Constitution requires to be studied.

    In August 2007, Dr K.R. Shanmugam, a colleague of mine at Madras School of Economics and I published an article suggesting some major changes in the development strategy as well as the principles of central and state transfers in the light of political, economic developments since Independence.1 However, it was found that in a short journal article all the rationale for changes in policies could not be spelt out. Moreover, as we went deeper into the subject, it became clear that backwardness and poverty themselves had to be treated as important causative factors. Hence, it was decided to explore the issues further (my colleague Dr Shanmugam could not continue working on this as he had been given new responsibilities at MSE).

    It turned out as we studied the subject in greater detail that one of the major faults of our earlier policy is that almost all intellectual background was formed by democratic socialistic policy in which the greatest responsibility was given to the government but nothing much was said about on keeping the government on tract. In many years, fiscal policies often lead to distortions due to political, economic considerations or some other reasons. I had published articles in journals on such matters. I find that two good articles can be published together with the one whose title is already stated; that is, this book will consist of three articles.


    1. Chelliah, R.J. and K.R Shanmugam. 2007. ‘Strategy for Poverty Reduction and Narrowing Regional Disparities’, Economic and Political Weekly, 42(34), 25 August—31 August 2007: 3475–81.



    My principal indebtedness is to Dr K.R. Shanmugam, who guided me in all matters statistical and also certified as to the accuracy of complicated data. Other than that, I am indebted to him for allowing me to use some of his materials.

    Ms Sudha has been an excellent stenographer and an expert in the preparation of documents.

    Mr S. Satya Moorthi, the Research Assistant, has rendered help often flowing over the lines of duty. His works could always be relied upon.

  • About the Author

    Raja J. Chelliah (1922–2009) was one of India's most respected economists, referred to as the Father of Tax Reforms by his peers. Dr Chelliah is best known for his work as Chairman of the Tax Reforms Committee between 1991 and 1993, which set out a roadmap for reducing import duties. This paved the way for liberalisation in India. A specialist in public finance and an institutional builder, Dr Chelliah founded the National Institute of Public Finance and Policy in 1976 and built it up into a full-fledged research institution in fiscal matters. He also founded the Madras School of Economics and was Professor Emeritus there. Dr Chelliah served as a Planning Commission member (1987–89) and on the Ninth Finance Commission. He also held the post of Fiscal Advisor in the Union Ministry of Finance (1993–95). He was honoured with a Padma Vibhushan in 2007.

    His publications include: Towards Sustainable Growth: Essays in Fiscal and Financial Sector Reforms in India (1996), Ecotaxes on Polluting Inputs and Outputs (2007), Income—Poverty and Beyond (2002), Reports on India's Tax Reforms (with Vijay L. Kelkar, 2003).

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