State Finance in India: Emerging Issues and Fiscal Challenges

There have been significant post-pandemic fiscal corrections in India at the Union and State levels. Our analysis shows that excessive fiscal corrections by some States coupled with the emergence of revenue deficits resulted in underutilisation of fiscal space and lower capital expenditure than its potential at the State level. However, many fiscal risks remain. Some of the major risks include increasing off-budget operations by the States. The study notes that a future bailout of distribution companies (DISCOMs) may significantly reduce fiscal space for development spending at the State level. The study concludes that State-specific fiscal risks need appropriate policy consideration for a sustainable fiscal recovery. JEL Codes: H72, H74