Finance as a constraint - a close look at Assam

by Dr Amiya Sharma

The creation of many a nation state may be accidents of history. The North East as an integral part of India is an example of such accidents of history. This region that was never occupied by any ruler from the Indian mainland came under the British because one of its leaders sought the help of the British to overthrow the Burmese invaders. What, if Badan Barphukan, a patriotic general himself, had not gone to seek the help of the British! Would the NE then have become a country belonging to the SE Asia – as another poor country like Laos, Kampuchia or as rich as Thailand, Indonesia, Malaysia or even Singapore? Anyway, the fact of the matter is that it is not a South East Asian country, but one of the poorest regions of the most powerful South Asian country, a country known more for its population pressure and poverty than for the muslin, silk, handloom and handicraft, tea or spices. The NE region and Assam in particular have been much in the news because of the problems created by insurgency. Lack of development is perhaps the main cause of insurgency which in turn has been blamed for strangulation of the development process. In this article, an attempt is being made to look closely into other factors like finance which may also contribute to the vicious circle.

Had India been a rich country, most probably the NE would have been happy with the accident of history. Had the NE been a rich part of the country, then too the accident of history may have been overlooked. But what is noticed is that while on the eve of independence Assam which practically meant today's NE was one of the richest part of the country, that is fifth in terms of per capita income, today it is one of the poorest region (sixth from the bottom). There is now a tremendous sense of alienation of the people of the area. While there is some agreement that the state of affairs is the result of the people themselves, nevertheless, the role of the Centre has not been perceived as sympathetic, until recently.

The downward trend in growth rates of Assam, in relative terms, seems to have started soon after the planning era. In 1951-52, the state’s per capita income, at 1980-81 prices, was Rs.1173 compared to India’s Rs 1127. By 1955-56, the per capita income of Assam was Rs1227 compared to India’s Rs 1229. It is seen that the ratio of NSDP to GDP itself has not changed much (NEIBM study), but because of the higher population growth in the state compared to the national growth rate, the growth of per capita income has been slower. By 1997-98, the per capita income of the state reached Rs 1673 whereas the all India figure was Rs.2848. Table 1 below shows the growth rates of Assam compared with that of the whole of India. It is seen that while the rates have been increasing for India, those for Assam have been going down.

Table – 1

Growth rates of NSDP/NNP at 1980-81 prices (in %)


























































Trend Growth




Source : Directorate of Economics and Statistics, Govt. of Assam

Since the growth rates in the NSDP alone would not give the whole picture, the sectoral growth rates are also given below. Agri and allied sector which had a share of 54% of NSDP in 1980-81 contributed only 38.48% in 1998-99 this decrease being expected in a developing country Mining and Manufacturing came up from 11.6% to 13.5% although manufacturing alone came down from 12.46% in 1990-91 to 8.2% in 1998-99. It is the tertiary sector which really grew consistently from 25.78% in 1980-81 to 42.49% in 1998-99. These trends give a contrasting picture when the Indian sectoral growth is considered.

Table – 2

Sectoral Contribution to SDP (at 70-71 prices)





(at 80-81 prices)

Primary (%)
Agri & allied, Mining & Quarrying





Secondary (%)
Manufacturing, Construction etc.





Tertiary Sector (%)
Transport, Communication, Trade & Hotel, Banking, Real Estate, Public Admn etc.





Source :

  1. "An Enquiry into the Institutional credit Flow in Assam" by North Eastern Institute of Bank Management, Assam

  2. Directorate of Economics and Statistics, Govt. of Assam

In case of the national economy, the fall in contribution of agri and allied sector has been much faster while the growth in the secondary sector much higher compared to Assam’s. In 1998-99, Agri, Forestry and Mining sector in India contributed 29.16 % while Manufacturing and construction contributed 24.71%. There is thus an indication that India as a whole is developing faster than Assam. Failure of the government, poor infrastructure, floods, unavailability of timely and adequate finance, poor law and order situation and the lack of local leadership can be put forward as the main factors causing fall in growth rates in the state. Among the three sectors, industry or the secondary sector depends most on government's initiative and patronage compared to agriculture and tertiary sector. There is also evidence that there has been downward slide in the quality of infrastructure in the state and this has affected the growth of industrial sector. Infrastructure development index was 84 in 1990-91 to 78.9 in 1993-94. Mere policies, guidelines declared from time to time are not good enough unless there is drastic change in the benefits to the private sector compared to the risk associated with starting an industrial venture in this area. Bandhs, strikes in the state have not affected the agri sector as much as it has the industrial sector. The service sector too has not been affected so much. In fact the prices in the NE are higher than those in the rest of the country only because of the poor infrastructure and the unrest here and this way the profit margins are taken care of.

Amongst all the constraints, the one which affect all the sectors equally and which can be removed without major overhaul is the problem of availability of finance in a timely fashion and in adequate amounts. Both term loan and working capital loans are in question here. Factors like infrastructure, insurgency, governance need a much larger effort and depend on a host of other factors for their solution. In the case of finance even a directive from the Govt. for nationalized banks or even the All India Financial Institutions(AIFIs) to increase their lending may do the job. If there could be a directive regarding priority sector lending, so could there be one regarding spatial or regional lending. Banks in the NE must have their C/D ratio at least 60% and similarly the NPA norms could be relaxed for these branches. Such suggestions are often seen in the various reports on industrializations of the NE.

Macro view of things is important in certain cases of policy making. But often micro views have to be taken into account for them to become more useful. In fact a micro view of things based on macro and consistent with it have become the most recent approach in theory of economic policy known as the micro foundation of macroeconomics. In India, the economic policies are normally made for the country as a whole. This may be one reason why these policies have usually failed in their implementation. No part of the country can be ignored when formulating a policy. Heterogeneity cannot be wished away. This has been realized and there is an effort now to take this into the ambit while formulating the plans.

The NE is a region that stands out because of its difference with the rest of India. The narrow chicken neck of 22 km (98% of the total boundary) connecting the NE with the Indian mainland underlines the difference. The main problem is of connectivity – both physically and psychologically. People in the mainland think of the NE as a remote area. Likewise people of the NE too have a feeling of living in an isolated place. May be this was not true before independence when the borders were open to reach the ports of Chittagong, Rangoon or Calcutta directly. Presence of hostile neighbours is one strategic reason why many infrastructural projects especially large Hydel projects may not have come up despite having 40% of the country’s hydro power potential. With a potential of about 38000 MW, the shortage of power for the 33 million people in the NE is an inexplicable situation. A large number of airports in the state that were in use during the British rule and beyond are now lying ababndoned. The Shukla Commission (March 1997), appointed by the Centre to study the backlog of infrastructure and basic necessities found that about Rs.94,000 crores was needed to bring the NE to the level of the rest of India in terms of infrastructure.

One area where macro outlook may not have helped the NE states is that the NE states basically follow the Planning Commission's directive while making their plans. This may mean that their own plans are getting influenced by the aggregate plan for the whole of India. And this may be the reason why despite agri sector contributing almost 40% of the NSDP of Assam as against 26% for India's GDP, budgetary allocation for agri and allied services is less than 5%. Even when differences are recognized as being industrially backward, the backward areas of the developed regions or state may garner all the benefits. Of late, there has been some realization of the above factors. In 1995 there was a proposal in the Central budget for a development bank for the North East which gave rise to the birth of the North Eastern Development Finance Corporation Ltd. Since 1995, the last three Prime Ministers have all made trips to the NE to announce a special package for the NE. In January, 2000, Prime Minister, A,B.Vajpayee announced a financial package of Rs10,271 crores for the development of the NE. There is now a non-lapsable pool at the Centre, earmarking unspent budgeted funds of the Central Ministries for the NE which also ensures availability of funds for the region.

According to a report in "India Today" February 14, 2000 the North Eastern States, along with Himachal Pradesh and Jammu and Kashmir receive 20% of the total central Govt. assistance, although they have less than 6% of the country’s population. As in Table-3, per family distribution of central assistance is very high for the North Eastern states including Assam. The funds are also cheap as 90% of it is grant and only 10% is loan. The other states on the other hand receive 70% as loan assistance and only 30% as grant.

Table - 3

Per family per month Central Assistance to NE States (1999-2000)


Per family Per Month (In Rs.)

Central assistance (1999-2000 Rs crore)




Arunachal Pradesh


















Source : India Today magazine (14th Feb’2000)

According to Gulshan Sachdeva Assam received the following amounts from the Centre:

Table – 4

Devolution and Transfer of Resources from Centre to Assam (Rs. in Crores)






Gross Devolution





Net Devolution





Total revenue receipts





The above amounts are important, given the state’s size because the average contribution from the Centre to Assam’s budget has been about 69% for almost each of the last 14 years whereas the all India average for the states is around 42%. Assam contributes around 20% from its tax revenue collection and less than 10% from non-tax revenue to its revenue expenditure. All India average is about 43% and 14% respectively. More efforts are needed to raise internal revenue and to unproductive expenditure. This will help the state govt. to spend more in welfare activities. It is seen that the Centre also allows the state 20% diversion of plan funds to meet revenue requirements. This and other concessions for the NE have created a sense of complacency and it is now becoming hard for these states to come up with even the 10% matching funds.

Another problem plaguing the state is its the lack of absorptive capacity. It is one thing to come up with matching sums for central schemes, but quite another thing to be able to spend the money in a timely fashion for completion of the projects. Time and cost overrunning in the NE has become a problem unlike in any other region. Some technical problems could be there but mostly it is inefficiency, corruption, lack of commitment of the leaders, which have led to failure of many projects. As recommended by the S K Shukla Commission, close monitoring of the projects need to be ensured. Participation of stakeholders in the projects can ensure some improvement in implementation. May be the Central Govt. should implement the project itself through Central government organizations like CPWD or BRO or its own consultants.

Given the market friendly environment since 1991, the private sector in Assam too would like to take up new ventures. But, for this, the entrepreneurs would need financial assistance from banks and financial institutions (FIs). While in the advanced states, getting loan for projects with reasonable feasibility outlook is not a problem and venture capital funds have mushroomed, this is not true in Assam. If term loan is difficult then working capital loan is almost impossible to get. Banks and FIs have pointed to low recovery rate as the main obstacle.

Assam is served by many financial institutions most of them under the public sector. Assam Industrial Development Corporation (AIDC) and Assam Financial Corporation (AFC) are the two main ones for financing industries. Both of them are in the doldrums because of bad repayment and new financing has almost come to halt. Even refinancing has been kept on hold by the refinancing institutions like SIDBI, IDBI. Therefore, entrepreneurs have to look upto the all India Financial Institutions (AIFIs). But they too have not done much. Table –5 below reflects the disparities in per capita sanctions and disbursements experienced by Assam vis-à-vis India.

Table - 5

Per Capita Assistance Sanctioned and Disbursed (Assam vs India)


Per capita sanctions (Cumulative upto end –March 1999) in Rupees

Per capita disbursement (Cumulative upto end –March 1999) in Rupees

  Assam India Assam India





























































Source : IDBI Report on Development Banking in India, 1998-99

Note : AFIs (All Financial Institutions) comprise all- India Development Banks viz., Industrial Development Bank of India (IDBI), IFCI (Industrial Finance Corporation of India), ICICI (Industrial Credit and Investment Bank of India), SIDBI (Small Industries Development Bank of India) and IIBI (Industrial Investment Bank of India); Specialized Financial Institutes (SFIs) viz., Risk Capital and Technology Finance Corporation Ltd. (RCTC), ICICI Venture and Tourism Finance Corporation of India (TFCI) and Investment Institutions viz. Life Insurance Corporation of India (LIC), Unit Trust of India (UTI) and General Insurance Corporation (GIC) and State Level Institutions viz. State Financial Corporations(SFCs) and State Industrial Development Corporations (SIDCs).

AIFIs (All India Financial Institutions) comprise all the above except the state level institutions.

It is noticed that AIDC and AFC have been disburshing less than Rs.2 crores and Rs.5 crores respectively since 1995-96. Total sanctions by AIFIs in Assam is only 0.44% of all India. This works out to Rs.785 per capita, while the same for Punjab is Rs.4470.9/-. In the case of major FIs like the IDBI, ICICI, IFCI, SIDBI and IIBI the percentage is 0.47. These amounts should be compared with those for other states like Punjab (2.34%), Andhra Pradesh (7.62%) to show that Assam has been a poor beneficiary. (Figures are cumulative up to March end 1999)

In the case of banks, the disparities are even more marked. The number of bank branches in the country increased between 1994 and 1999 by 4.35 %. In the NE, the same is 2.31%. In Assam the growth rate is 0.12% from 1293 in 1994 to 1301 in 1999.

In terms of deposit mobilization, the total in Assam was Rs.3,154 crores The per capita bank deposit of the state is Rs.2,868/- in 1999 as against Rs.1,358/- in the 1994. This compares poorly with corresponding All India figure of Rs.13,912/- and Rs.7,059.

In terms of credit, the total amount deployed in Assam was Rs 2,214 crores of which rural semi urban and urban break up were Rs.71,3crores, Rs.60,1crores and Rs.89,9crores respectively. The above figures point to a low C/D ratio of 31.5% in 1999. This is as against the all India average of 55.5%. Is this low credit deployment made up by investment in government securities by the banks? It is seen that the total investment in government and other approved securities stood at Rs.979 crores, giving a (C+I)/D ratio of 44% in 1999 as against 83% for all India.

After the introduction of market friendly policies in India, FDI has increased to significant levels (over $4 billion in some years). Here too, the developed states have attracted most of the investment while only an insignificant amount has filtered into the North East. Out of the total number of 37,402 IEMs (Industrial Entrepreneur Memorandum) application filed under delicensed sector and LOIs (Letters of intent) issued in respect of items under the licensed sector, between August 1991 and September 1998) Assam’s share is only 86 with proposed investment of Rs 2580 crores (For the nation, it is Rs 6,36,340 crores).

From the above it is seen that while the state government is getting a sizeable amount of fund from the Centre, the financial institutions have neglected their development role somewhat. Is this going to be the trend given that liberalization hurts the weak and helps the strong? If one looks at the banking sector, at least this seems to be the case since before 1991 the credit to deposit ratio was comparably high 53.09% in 1990.

Priority sector lending does not present a satisfactory picture in the state although it is amongst the most important goals of social banking. Per capita deployment of priority sector lending is Rs350 in 1999 as against more than Rs.750 in the country as a whole. In case of agriculture, the priority sector advances constituted 20% only in 1999 and outstanding loans per hectare of gross cropped area was amongst the lowest in the country. As mentioned above agriculture is the main contributor to the state economy and this sector has been almost completely ignored by the Financial Institutions. An NEIBM study shows that proportion of bank credit to agricultural sector was 62% in 1958 and in 1995 the same was only 16%. The same study also mentions that in the 1990s, almost 50% of the total credit has been cornered by five main towns having 4% of the population while the rest is shared by 96% of the people, mostly rural.

It is not that there have been no efforts by the government to rectify this. In the SLBC meetings and other forums the banks have been repeatedly requested and even warned. But even then there does not seem to be any perceptible change. There was a Central government directive for the banks to open 100 more branches in the NE in 1999-2000. But only three branches have come up.

Recovery has been a problem in the North East. Sample survey by NEIBM mentions that in 1995, the rate was slightly more than 10% for bank loans. Experience at NEDF, IDBI, SIDBI has also been very bad regarding repayment of loans. But there is scope to believe that the problem is not willful default but because of projects going bad due to various technical, market as well as institutional problems. Financial institutions need to appreciate these problems. Repayment has been found to be better for small loans in the rural areas, particularly for agriculture. In the urban areas, the recovery rate is better for bigger loans. Thus most of the loans have been going to this sector although agri and trade sectors have been contributing more in NSDP. The credit flow must improve in the state just as deposit has been increasing. For a poor region, the deposit mobilized should at least remain within, if not in credit then in investment in designated securities.

There are complaints that the system of keeping the officers in the NE for two years has not helped the area. The way the officers have been pulled up for bad loans even after ten years, make them very cautious because of the bad recovery record in Assam. This has resulted in dilatory handling of credit applications resulting in turning away of good borrowers. Earlier defaults mostly arising out of factors beyond the control of the borrowers have given rise to a problem of severe credit restriction and corresponding adverse selection and moral hazard problem. Government too has not given the help required to expedite the bakijai cases accentuating the problem of adverse selection further. These problems, of course, are not analysed by the people from outside who merely view the NE as a problem area. That their views themselves have worsened the problems need to be stressed.

To conclude, the above analysis shows that while the government has been getting substantial amounts of funds from the Centre, the intention, efficiency are in question. A large amount of funds have also been tapped from the World Bank and other international funding institutions. For instance, under the Assam Rural Infrastructure and Agricultural Services Project (ARIASP), World Bank has given an assistance of Rs.567.65 crores in 1995. However, revenue expenditure has been increasing everyday; wages, salaries and pension taking a major chunk. Diversion of funds from plan to non-plans heads, inability to provide matching amounts for the Central schemes have become very common events. At this juncture, the private sector should have been able to fill up the vacuum. But there is severe funds crunch – the AIFIs and banks as well as the state level organizations have been disbursing increasingly smaller amounts in the region. Compared to the other states, there is hardly any Foreign Direct Investment in the state. Under these circumstances, this poor state will have become poorer and insurgency may prosper, in spite of the initiatives taken by the Central government.

Note: The author is grateful to Ms Ajanta Phatowali for the assistance rendered in preparation of this article.

References :

  1. Gulshan Sachdeva : Economy of the North East : Policy, Present Conditions and Future Possibilities"

  2. India Today magazine, 4th Feb’2000 Issue.

  3. V S Kaveri :Banking in the north Eastern Region – an interstate Analysis, 2000

  4. IDBI: Report on Development Banking, 1998-99

  5. NEIBM: An Enquiry into the Institutional Credit Flow in Assam, 1998

  6. India :2000 Observer Statistical Handbook, Observer Research Foundation, 2000

  7. State Finances – The Factual Position : Finance (Economic Affairs) Department, Govt. of Assam, 1999

  8. Assam 2000 – A Hand Book : Directorate of Information & Public Relations, Govt. of Assam

Dr Sharma is an economist and working with RGVN as working for NEDFi, Guwahati. 

© Dr Amiya Sharma.

This article was written on 2004-12-07.
Currently Dr Sharma is the Executive Director at Rashtriya Gramin Vikas Nidhi.