Have Fiscal Responsibility Legislations made state governments in India more prudent?

What is it about?

Getting subnational governments to behave in a fiscally responsible manner is a challenge in federations. Fiscal Responsibility Legislation (FRL), which binds subnational governments to fiscal prudence, has been seen as a way of meeting this challenge. We examine this issue in the context of states in the Indian federation. We seek to investigate the extent to which states have tried to improve their fiscal health in the post-FRL period. FRLs. Our analysis suggests that federal transfers have likely played a much more important role in the process of restoring states’ fiscal health as compared to their own-efforts at such improvement. This paper thus signals the need to re-look at the quantum and design of intergovernmental transfer such that states are encouraged to boost their own-revenue collection efforts.

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Why is it important?

State finances should improve either due to increase in states' own revenues or decrease in their expenditures. Transfers from the federal govt, should not be the primary reason for improvement in state finances. We have found that despite Fiscal Responsible Legislation, states continue to depend on federal transfers and have not improved their finances by their own efforts.

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