Improving States’ Finances and Financing Capacity

One of the consequences of the series of fiscal measures adopted by the sub-national reforms has been the increasing investment of the huge cash surpluses in the Central Government-issued Treasury Bills by the State Governments. This has become a crucial issue in the fiscal management at sub-national level, particularly in the context of low investment in infrastructure and social services. This paper makes an attempt to explain the improvement in the fiscal behavior of states of the Indian Union as more of macro in nature. Examining the fiscal variables through multiple regression technique, the paper explores the least responsiveness of capital expenditure to the annual borrowings by the state governments (as an indicator of the absorptive capacity of the states to annual borrowings). Revenue expenditure has been found as the predominant determinant of borrowings at state level, irrespective of the development levels or reforms process. As the other variables, such as tax revenues and Central grants, have not come out as significant through the model, it again confirms the observation that the financing capacity of state governments has to be improved substantially.