Creating fiscal space for the states

In the second part of a series, the authors say the current uncertainties require room for discretion to serve as a necessary handmaiden of rules that cannot alone cater to all contingencies

In our previous column, we spelt out a menu of fiscal options for the country to finance possible additional expenditures of up to five per cent of Gross Domestic Product (GDP). In this column, we elaborate on the idea, specifically on how the financing should be allocated between the Centre and the states.

Start first with the basic principle of public finance in a federal system. The states raise resources and spend it on local goods while the Centre raises it for providing national public goods, one of which is preventing and managing national crises. In a typical