By Aditya Sinha
Frédéric Bastiat once remarked, “Government is the great fiction through which everybody endeavours to live at the expense of everybody else.” Nowhere is this fiction more evident than in India’s sub-national public finance, where the illusion of infinite resources drives chronic overspending, mounting debts, and political short-termism. Sub-national fiscal responsibility legislations (FRLs) were introduced to impose discipline, but their design and enforcement vary widely across states, reflecting a troubling lack of uniformity. While some states adhere to stringent rules and demonstrate fiscal prudence, others exploit loopholes or ignore long-term consequences in favour of immediate political gains. This stark variation, coupled with economic mismanagement, creates a dangerous cocktail of fiscal instability. Without consistent standards and stronger accountability, India risks plunging into a fiscal disaster where one state’s excesses could spill over and undermine the nation’s economic foundation.
The Reserve Bank of India (RBI), in its latest State Finances Report, has reviewed sub-national FRLs, and the report is worth a read. Fiscal transparency is a cornerstone of good governance. While the Union government has made significant strides in fiscal transparency, state governments have also adopted measures to enhance their fiscal disclosures. Key principles include publishing accessible Budget documents like “Budget at a Glance” and disclosing significant changes in accounting standards or fiscal practices. States such as Himachal Pradesh, Jharkhand, Karnataka, Maharashtra, Odisha, and Rajasthan stand out for explicitly reporting these disclosures. Some states — Andhra Pradesh, Bihar, Chhattisgarh, Gujarat, Haryana, Madhya Pradesh, Odisha, and Rajasthan — have legislated the actuarial disclosure of pension liabilities for the next decade, enhancing fiscal foresight. However, uniformity in revealing other sensitive fiscal data, such as contingent liabilities and off-budget borrowings, remains challenging. Supplementary grants, commonly used to manage unforeseen expenditures, are disclosed by most states as mandated by their FRLs, though actual utilisation often falls short of estimates.
More importantly, the RBI has evaluated state Budgets through the lens of the Public Expenditure and Financial Accountability (PEFA) framework. It analyses Budgets using 31 performance indicators grouped under seven pillars, focusing on Budget reliability and transparency of public finances. PEFA scores range from “A” to “D”, based on how closely actual receipts and expenditures align with Budget estimates over a three-year period.
The PEFA scores across 20 major Indian states highlight systemic issues in budgeting accuracy, particularly in revenue receipts. During period I (2016-17 to 2018-19), states such as Jharkhand, Madhya Pradesh, and Odisha achieved “A”, but by period II (2019-20 to 2021-22) no state managed to secure even a “B”, with 16 states, including Andhra Pradesh, Bihar, and Rajasthan, falling to a “D”. This decline underscores weaknesses in fiscal forecasting and budgeting processes, including poor estimation of key revenue components like state goods and services tax. However, it is important to acknowledge the significant impact of Covid-19 during period II, which disrupted economic activity, created volatility in central transfers, and added unprecedented challenges to fiscal management. While systemic issues like resource constraints and infrastructural bottlenecks remain critical, the pandemic undeniably exacerbated budgeting inefficiencies at the state level.
The PEFA scores for revenue expenditure also reveal significant deviations from Budget estimates across key sectors. In sectors such as urban development, agriculture and allied activities, rural development, and energy, most states consistently fell into the “D” category in both period I and II. For example, in agriculture and allied activities, only Tamil Nadu maintained an “A”, while most other states, such as Bihar, Gujarat, and Uttar Pradesh, failed to achieve even a “C”. Similarly, in urban development, no state secured an “A” or “B” in period II, reflecting systemic inefficiencies in planning and execution. Further, given the freebies being doled out across states, the fiscal marksmanship under this category might deteriorate in the future.
The PEFA scores for capital expenditure across Indian states reveal a sharp decline in fiscal marksmanship, with fewer states achieving credible scores in period II compared to period I. While states like Karnataka, Madhya Pradesh, and Odisha achieved “A” in period I, only Jharkhand and Telangana achieved it in period II, and the number of states falling to the lowest “D” category surged to 13. Sectors such as urban development, irrigation, transport, and water supply saw widespread deterioration, with states like Andhra Pradesh, Bihar, and Maharashtra consistently scoring “D”. Even traditionally stable sectors like medical and public health failed to secure meaningful improvements. While the Covid-19 pandemic undeniably disrupted fiscal planning and execution, the toll on capital expenditure reflects deeper structural weaknesses, including poor programme management and prioritising fiscal rule compliance over long-term investment. This persistent underperformance underscores the inability of states to effectively plan and execute capital budgets, compromising critical infrastructure development across the board. The underperformance in capital expenditure is particularly concerning, given its significantly higher economic multiplier than revenue expenditure.
To address the persistent gaps in state-level budgeting and fiscal marksmanship, there must be stronger incentives for states to improve their fiscal planning and bring off-budget borrowings into the formal fiscal framework. The Finance Commission could play a pivotal role by linking grants and allocations to improved Budget reliability, better fiscal disclosures, and adherence to FRL. By tying these grants to measurable reforms, states would have a tangible incentive to enhance transparency and accuracy in their budgeting processes. Without such conditions, it will be difficult to nudge states toward the next generation of reforms to strengthen subnational FRLs.
The writer is a public policy professional.
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