Expenditure Implications of India's State-level Fiscal Crisis

India's states have significant developmental expenditure responsibilities. While the "fiscal crisis" which engulfed India's states in the late nineties led to higher deficits and debt levels, it was also associated with a rapid increase in expenditure levels, and it might be thought that this would have increased the development effectiveness of the state governments. However, a closer look at the data reveals that this is not the case. The main positive fiscal development in the post 1996/97 period is a pick up in real growth in government capital expenditure. In other respects, the fiscal crisis weakened the developmental and poverty impact of state governments especially in the poor states. Real growth of expenditure in health and education slowed, in some cases halted, and the efficiency of government expenditure fell as liquidity constraints tightened and non-salary expenditures were crowded out.