How state finances could delay investment cycle

Worsening state finances widely appreciated; their impact on private investments less understood

Ever since the mini balance of payments crisis of 2013, Indian policymakers have placed a premium on restoring and maintaining macroeconomic stability, manifested in lower central fiscal deficits, muted minimum support price increases, the move to inflation targeting and building a war chest of reserves.

The only blemish against this impressive record has been deteriorating state finances. This is particularly surprising, and perhaps why it took so long to emerge into the public consciousness, because states were always seen as paragons of fiscal virtue, with their combined deficit at just two per cent by 2012-13. Then things began to inflect. The