During 2001-16, State Finances in India have undergone significant changes in both revenue mobilization and controlling expenditures which helped states to contain deficits (revenue as well as fiscal). Introduction of Value Added Tax (VAT) helped states to augment revenue mobilization whereas adoption of Fiscal Responsibility Budget Management (FRBM) Act helped states in prudential fiscal management. During the period, the improvement in union finances was not as good as state finances. There were two significant shocks to Indian public finances during 2001-16 – firstly, introduction of pay revision for the union as well as majority state government employees, in response to recommendations of the Sixth Central Pay Commission and secondly, global financial crisis (2008-09). States experienced revenue shocks mostly through fall in states’ share in central taxes and a mild fall in own tax revenue mobilization during 2008-10. Higher pressure on revenue expenditure due to implementation of the pay commission recommendations (including revision of pensions and payment of arrears) and falling share in central taxes resulted in rise in revenue deficits for states during 2008-10. As a strategy to combat fiscal shocks, different states adopted different measures and some of the measures have inter-temporal implications. The objective of the present paper is to assess the impact of the shocks in Indian public finances and identify challenges for the times to come. Though increasing revenue (‘front loading’) and reducing expenditure (‘back loading’) are common responses to any fiscal shock, understanding inter-temporal implications of those responses with specific to changing structure of inter-governmental fiscal transfers could be an interesting exercise. 

 

Key Words:  Indian Public Finance, Indian State Finances, Fiscal spillover, Fiscal Management, Revenue mobilization, inter-governmental fiscal relationship, Revenue Deficit, Fiscal Deficit   

 

JEL Classification Codes: H20, H12, H71, H77