POVERTY REDUCTION STRATEGY TN

The chain from growth to human development can be traced as follows: with
higher growth, government earns and spends more relative to GDP, the composition of
its spending favour the human development priority sectors more; at the same time, with
higher per capita incomes, household expenditure also increases in favour of health and
education. The impact on poor households is higher when growth and fiscal policies are
human development-oriented.
Lipton and Ravallion (1995) note that undifferentiated subsidisation of human
capital formation is unlikely to be inherently pro-poor. They observe: “Income elasticities
of demand for education and health care of unity or higher are plausible for LDCs (Theil
and Finke, 1985; Schieber and Poullier, 1989; and Gertler and van der Gaag, 1990).
However, a consensus is emerging in favour of differentiated expansion in primary
education and basic health care, as an instrument for poverty reduction (World Bank,
1990)”.
Empirical studies on incidence of subsidies note that existing allocations to
primary education and basic health care are generally pro-poor, as much of the subsidies
per head received by the poor account for a relatively higher proportion of their income
or expenditure. Also, the rich shift to private market for health and education in search of
better quality of services. Allocations to education and health care above primary level,
however, favour the non-poor as they have better access to higher education and
specialty hospitals.
3.2 State Finance of Tamil Nadu: An Overview
This section looks at Tamil Nadu’s state finances in a medium term perspective in the
context of the growth and the changing structure of the Tamil Nadu economy. Tamil
Nadu has historically been one of the fiscally better managed states, although like all
other state governments, Tamil Nadu had also witnessed deterioration in various
indicators of fiscal balance towards the end of the nineties and the early years of the
current decade including large revenue deficits, and large fiscal deficits relative to GSDP.
Tamil Nadu’s major strength emanates from its distinction of having the highest tax-
GSDP ratio among all Indian states.
The reasons for deterioration during the late nineties up to the first few years of
the current decade are to be found in low growth rates in the first three years of the
decade, the impact of salary increases in the wake of the recommendations of Fifth
Central Pay Commission in combination with the fact that Tamil Nadu has a very high
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