Fiscal dependency of States in India

Fiscal management and fiscal dependency are closely interlinked in any federal system. On account of improper fiscal management and enhanced development expenditure responsibilities, sub-national governments by and large end up with a huge resource gap, which necessitates fiscal and policy interventions by the higher level of government as part of bridging the resource gap. The first part of the current analysis explains the role of various sources of revenue in financing the basic resource gaps of the states and the second part decomposes the level and pattern of fiscal dependency on the different components of total transfers with respect to 14 major Indian states for the period 1981-82 to 2014-15. A phase-wise analysis of the states’ dependency and its varying nature provides a meaningful insight into the relative role of the different sources of revenue in financing the total expenditure. The fiscal adjustment measures undertaken over time point to the poor fiscal health of the Indian states. The study finds that despite a fair improvement in revenue generation on the part of states, the basic resource gap continues to persist, with a steady rise in the total expenditure with an enhanced capital spending and a decline in the non-debt capital receipts and also that a shift in the pattern of financing the total expenditure from non-obligatory sources of revenue to obligatory sources of revenue has further enhanced heterogeneity across states in terms of fiscal management.