Deteriorating Fiscal Outlook and Dependency of States on Centre in India

Abstract

The fiscal outlook of the subnational governments has continued to deteriorate as there has been a rapid increase in their expenditure on the one hand and the revenue receipts lagging behind on the other hand. Hence, Subnational governments are becoming more and more policy dependent as well as fiscally dependent on federal government. The fiscal containment movement, by undermining subnational governments' independent revenue bases, is providing one more large push toward fiscal dependence. Alongside increased fiscal dependence, the accumulating impact of great number of federal mandates on subnational governments is institutionalizing increasing policy dependence as well. States have been more depending on high cost borrowing for financing their plans, with very little own funds and decelerating central assistance. As a result, the interest burden has been rising. There has been a steady increase in the share of revenue expenditure across the states over time. The paper concludes and clearly indicates that the urgency and the need for remedial measures to be undertaken at the states' level if the deterioration in the fiscal health of the states is to be arrested.