Academic journal article Journal of Management and Public Policy

State Level Fiscal Reforms in India: Issues and Remedies

Academic journal article Journal of Management and Public Policy

State Level Fiscal Reforms in India: Issues and Remedies

Article excerpt


India has experienced rapid economic growth over the past two decades, averaging about 6% per year. Sustaining and accelerating this progress, as per the country's development targets, will require an improvement in government effectiveness, not only at the central but also at the state level, given the extensive responsibilities of India's state governments for infrastructure and human development. But fiscal deterioration, especially acute in the late nineties, has weakened the development effectiveness of state governments in India by squeezing productive spending and reducing its quality, especially in the poorer states. As is well known, the fiscal situation of Centre & States has deteriorated continuously in 1990s, especially after 1997. The state governments of India have embarked on two pronged fiscal reforms i.e. (i) reducing deficits and (ii) better spending on priority areas, during last one decade. Before that, fiscal management was an alien term. In the light of the above discussion, the remainder of the paper is organized as follows. It presents the objectives and databases used in the study, followed by a discussion on the methodology used. Subsequently, it discusses the important components of public expenditure in India. Then, it discusses reforms finally, the conclusion is offered with implications.

The role of state governments is much diversified. The Indian constitution entrusted the states with functions both expensive and expansive such as agriculture, irrigation, roads and buildings, rural development, education, medical and public health and law and order along with revenue powers mostly inelastic in nature. Since the advent of five year plans these expenditure commitments have been increasing considerably. Public expenditure plays a very important role in economic development. Public expenditure is the expenditure incurred by the public authorities that is Central government, state governments and local bodies for the satisfaction of collective needs of the citizens for the promotion of economic and social welfare. The share of developmental expenditure of state governments is increasing at a faster pace than the Central government expenditure. This amply demonstrates the crucial role played by the states expenditure in the Indian Union. The growth of expenditure of the states was to fulfill the two objectives of economic growth and economic welfare. To attain these two objectives not only public investment but also private investment is also needed. Given the current tempo while a number of states will fulfill the target, others in all likelihood may fail to fulfill the target. So also the strategy of states appears to be ill-conceived. The revenue effort of the states cannot be said to be very impressive.

Finances in most States remained under stress during 2008-09 and 2009-10. In 2008-09, revenue account was impacted across 19 States largely due to the upward revision of salaries in a few States and the impact of a slowdown on own tax and non-tax collections. Poor Central tax collections also led to lower tax devolutions as a ratio of GSDP across 26 States, albeit partly compensated through higher grants from the Centre. Deterioration in revenue account was evident in higher GFD-GSDP ratios across the majority of States in 2008-09. Nonetheless, with the fiscal headroom generated in previous years, 21 States could continue to achieve revenue surplus in 2008-09. In 2009-10, many States were still in the process of implementing the revised pay structures which, along with the expansionary fiscal stimulus measures undertaken by many States, resulted in a more pronounced deterioration in the revenue account. The re - emergence of a revenue deficit after three years and higher capital outlay led to a higher GFD - GSDP ratio across States in 2009-10.

Objectives and Methodology

In view of the above theoretical background the objective of the present study is to examine the background and to identify the major issues at state level fiscal reforms in India. …

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