ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

Farah ZahirSubscribe to Farah Zahir

Indian States' Fiscal Correction: An Unfinished Agenda

More than half of the 14 major states achieved significant fiscal correction during 2000-06, with Karnataka, Tamil Nadu, Orissa and Haryana in the lead. However, some high and middle income states lag behind, continuing to accumulate unsustainably high levels of debt and guarantees. The majority of states have relied more on enhancing their own revenues than on contracting expenditures, which is welcome in the context of the squeeze on infrastructure and social service expenditures that states had experienced over the 1990s. Those that have committed to fiscal responsibility and have achieved significant correction now face the challenge of translating outlays to outcomes. Those that lag behind must first address the challenge of fiscal discipline, learning from the success of others. It would be advisable to target the end-of-year stock of outstanding debt and guarantees, in addition to current account balance ("golden rule"). Monitoring of end-of-year stock rather than annual flows would enhance year-to-year flexibility in states' fiscal management, while remaining within an agreed correction path.

Why Fiscal Adjustment Now

Fiscal adjustment is needed not to stave off an imminent crisis, but because postponing reform would place long-run sustained growth in jeopardy. Alternatively, a phased adjustment that begins immediately and is implemented over the Tenth Plan period will improve spending composition in a manner conducive to faster growth and poverty reduction, and reduce deficits gradually.
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