State Level Fiscal Reforms in India

There has been a steep deterioration in State finances during the last decade as evidenced by sharp increases in revenue, fiscal and primary deficits, increases in their indebtedness and contingent liabilities, and decline in capital and maintenance expenditures. Low buoyancy of central transfers and spillover of central pay revisions have had the most adverse impact on State finances. However, the States’ own fiscal performance has also seen sharp deterioration. On the transfer system, the scheme proposed by the Ministry of Finance attempts to link a portion of transfers to fiscal reforms. There are serious design issues in the scheme. It is not certain whether the scheme will be effective either. The paper details the areas of reform the States should focus on to impart efficiency and improve revenue productivity of revenues and prioritisation and compression of unproductive expenditures. These, however, require a strong political will and administrative competence and involvement of the public in the reform process. State Finances in India M. Govinda Rao