ADB India Economic Bulletin June 2003 Volume I, Number 2

Abstract

A federation like India the responsibility of a large consolidated fiscal deficit amounting to 9.3% of GDP in FY2002 rests equally with the state governments. Controlling the fiscal situation of the central government thus addresses only a part of the problem. Fiscal responsibility at the subnational levels is generally achieved in two ways: an autonomous bottom-up approach where each state initiates fiscal reforms; and a top-down approach where each state is subject to an uniform set of rules to ensure a degree of fiscal discipline monitored by a central authority. In a federation like India where most states face large fiscal deficits, a coordinated approach under central surveillance may be the best way forward. Fiscal consolidation at the state level using such a top-down approach is being attempted through the Medium-Term Fiscal Reform Program for states, negotiated between the central government and several state governments. It features incentives for state fiscal reforms through performance-linked transfers from the central government.