Growing fiscal pressures on State Governments have significant implications for India’s macroeconomic stability. Discuss.

State Governments account for a major share of public expenditure and capital investment in India. However, rising fiscal pressures have increasingly constrained their ability to undertake developmental spending and maintain fiscal sustainability.

Major Fiscal Pressures

• Rising Subsidies and Freebies: Large subsidy commitments and welfare freebies increase revenue expenditure without creating productive assets, reducing fiscal space for capital expenditure.
• Growing

Pension

• Liabilities: Pensions constitute committed expenditure that must be paid irrespective of the revenue position. The return of some States to the Old Pension Scheme (OPS) has increased long-term fiscal liabilities.
• Financial Stress of DISCOMs: Persistent losses due to tariff distortions, high AT&C losses and delayed subsidy payments necessitate repeated State bailouts.

E.g., UDAY Scheme and RDSS.

• Rising Contingent Liabilities and Off-budget Borrowings: Borrowings through State PSUs and SPVs remain outside the budget but ultimately become liabilities of the State Government, weakening fiscal transparency.
• Fiscal Federal Constraints: Growing reliance of the Centre on cesses and surcharges, borrowing limits under Article 293, loss of taxation autonomy under GST, and restrictions on off-budget borrowings have constrained States' fiscal flexibility.

Way Forward:

• Rationalise subsidies and improve targeting through DBT.
• Accelerate power sector reforms to reduce recurring DISCOM losses.
• Strengthen fiscal transparency by limiting off-budget borrowings and preventing expenditure misclassification.
• Broaden States' own tax base through greater formalisation and improved tax administration.
• Reduce excessive reliance on cesses and surcharges to ensure adequate tax devolution to States.
• Deploy borrowed resources primarily towards productive capital expenditure with high economic returns.

Sustainable State finances are indispensable for India's fiscal stability and longterm economic growth. Strengthening fiscal discipline, improving expenditure quality and ensuring a balanced fiscal federal framework will enable States to meet developmental objectives without compromising macroeconomic stability.