Widening cracks in state finances: Revenue deficits risk fiscal stability

These state-specific fiscal vulnerabilities need appropriate policy considerations to enable sustainable fiscal recovery and innovative ways to augment the revenue space

India’s federal fiscal policy has behaved well post-pandemic, with both the Centre and states aligning their consolidation path until recently. While the Centre has been able to overachieve its fiscal targets in most years, states in aggregate have also managed to be fiscally prudent, though the nature of consolidation has differed for both. Unlike the Centre, which enjoyed a better revenue stream to fund its spending, most states’ fiscal discipline came at the cost of underspending compared to their budgets — thanks to missed revenue projections versus what was budgeted.

 

While markets tend to mostly focus on the Centre’s budgetary