The paper assesses the remarkable success story of State of Odisha in making fiscal correction after adopting the fiscal rules and the policy responses.  The degree of correction was one of the highest among the Indian States.  The tradeoff between fiscal restraint and the development priorities assumes significance as a relatively economically weak State like Odisha maintained a very low-deficit regime by limiting the public spending for a long time. The paper highlights that while fiscal discipline improves the ability of the Government to prioritize among policy choices and improve operational management, strict imposition of self-restraint and large adjustments may lead to distortions. After a decade of controlled fiscal management, as the State has started opening up by expanding the public spending, the shrinking fiscal space, slow growth of internal revenue, and high dependence on Central funds present new challenges. The paper examines the institutional reforms in this context to address emerging fiscal architecture. 

 

Keywords: Sub-national fiscal policy, fiscal federal system, Fiscal rules, Budgeting system, Medium term perspective

 

JEL Classification Codes: H61, H72, H77, E61