Fiscal adjustment and the role of state governments

Abstract

State governments play an important role in the provision of public services and in raising revenues to finance them. Therefore, to be successful, it is necessary to involve the state governments in the fiscal adjustment undertaken in India since 1991. In this paper. an attempt is made to identify the major shortcomings of the public finances of the state governments in India. This paper highlights the problem of escalating current expenditures, distortions and inequities in states' tax revenues and the inability of thestates in levying user charges at economic rates on many of the commercial services provided by them. Successful fiscal adjustment at state level calls for reforms in revenue and expenditure policies on the lines suggested in the paper.