The widening cracks in state finances

India's federal fiscal policy has behaved well post-pandemic, with both the Centre and states aligning their consolidation path until recently.

- MADHAVI ARORA

While the Centre has been able to overachieve its fiscal targets in most years, states in aggregate have also managed to be fiscally prudent, though the nature of consolidation has differed for both. Unlike the Centre, which enjoyed a better revenue stream to fund its spending, most states' fiscal discipline came at the cost of under-spending compared to their budgets thanks to missed revenue projections versus what was budgeted.

While markets tend to mostly focus on the Centre's budgetary choices, state finances are an equally important component of India's fiscal policy states collectively spend more than the Union government (excluding the public sector enterprises), and their gross dated borrowing generally amounts to approximately 65 per cent of the Centre's. Empirical evidence also points to higher multipliers for state capital expenditure (capex) relative to that of the Centre. The changing political map of India has reignited fears that political capital could get compromised, which would worsen budgetary choices and economic efficiencies. This merits a review of the deficit profiles of the states through the lens of the current fiscal and political landscape.