Fiscal Imbalances and Indebtedness across Indian States: Recent Trends

Abstract

This paper examines the extent to which the states have been successful in achieving the targets set by the FRBM Act (2003) in the last decade, and the route through which the necessary fiscal adjustments were undertaken. We find though there has been a clear reduction in all the deficit indicators, Special category states have done better adjustments, particularly in reduction of revenue deficit. However, this is not the case when it comes to debt reduction. It is also found that the low-income states have undertaken a greater extent of fiscal adjustment than both high- and middle-income states. Our analysis on the decomposition of revenue account adjustments coupled with the analysis of interest payments shows that there was no serious contraction of developmental expenditure in low income states except in Orissa to a small extent. This leads to the conclusion that the negative fallout of the fiscal adjustment process has been minimal.