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Public finances in India are at a turning point. Analysis of the past data, however,
shows no improvement in any of the major fiscal indicators. Restructuring of debt,
reforms in power sector and implementation of other issues under the Medium-Term
Fiscal Reform Program (MTFRP) hold promise for future. While the deterioration in
fiscal turning point in the last decade can be related to some proximate causes like pay
revision of employees or sluggish revenue growth because of a slowdown in the economy,the imbalances in the state budgets have their origin in factors that are structural in
character (Anand et al., 2001). Like in most other reform areas, the story of fiscal
correction in India has been that of a symbolic exercise. The attempt has been to take
the course of least resistance in implementing reforms. Govinda and Nath (2000) says
that “the way the government has chosen the fiscal indicators as targets for correction
and its various attempts at camouflaging and window-dressing the numbers on various
fiscal indicators adequately demonstrates this proposition. More than a decade after the
launch of the reform process, it seems that significant attention is still not paid to the
fiscal reforms at state level”. Despite several years of fiscal consolidation effort, large
and persistent fiscal deficits remain. India’s overall government spending, currently
around 33% of GDP (center and states together), will need to be brought down
substantially as a proportion of national product in order for India to achieve its reform
goals of macroeconomic stability and long-term rapid growth. The states’ increasingly
large deficits mean their fiscal policy is an important factor not only in their own
performance but in India’s overall fiscal sustainability. Deteriorating finances have
caused state spending on critical sectors such as health, education, irrigation, and
infrastructure to decline below the levels required to make further headway against
poverty. Concurrently, there has been an increase in spending on loss-making state
enterprises and massive subsidies for power, water, irrigation, and transport.
More and more states are now turning to fiscal reforms as the only way out of the
financial crisis they are facing. There has been no significant increase in the devolution
of funds from the center. The bulk of the revenue from new taxes goes to the center,
and state governments find their tax base shrinking and the framework to raise
fresh revenue rather inelastic. Under these circumstances, they have been driven to
undertake some fiscal reforms—essentially slashing subsidies, cutting expenditure
and trying to find new avenues to raise revenue, besides accepting the concept of
user charges. The basic objective of the paper is to study whether the support given
by the development agencies like World Bank will prove fruitful for the development
of states and which states in India are the major beneficiaries. The support from
development agencies is for a limited time period. Will the support of development
agencies be the only way for states to improve their fiscal situation?
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