ISP Working Paper Number 05-14-2

India: Fiscal Condition of the States, International Experience,and Options for Reform: Volume 2

Roy Bahl, Eunice Heredia-Ortiz, Jorge Martinez-Vazquez, Mark Rider, June 2005

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Abstract:

Due to the deteriorating fiscal situation of the states, the Government of India has taken several initiatives, including the creation of a Fiscal Reform Facility, which sought to provide financial-grant incentives to the states, in order to encourage a movement toward budget balance over the five year period coinciding with the implementation period of the Eleventh Finance Commission (2000-2005). The largely unsuccessful experience with the implementation of the Facility has made it necessary to explore other policy alternatives and, in particular, to examine what lessons international experience offers in managing sub-national fiscal crises and improving fiscal management of sub-national governments. The purpose of this report is to undertake that task. This report begins by reviewing the key issues responsible for the current fiscal condition of the States of India. Then, it provides an analysis of relevant international experience in this respect. Finally, it evaluates various options for reform in India suggested by lessons drawn from international experience, and it provides a set of recommendations for the consideration of Indian policy-makers.