The case for states to adopt fiscal reforms

  • December 29, 2025
  • India Polity

Hindustan Times

The case for states to adopt fiscal reforms

Core Theme and Context

The article argues that India’s macro-economic stability and growth prospects are increasingly constrained by state-level fiscal behaviour, and that meaningful reform must now shift decisively from the Union government to the States. It is framed against the backdrop of post-pandemic borrowing, rising debt burdens, and renewed attention from international financial institutions and markets to sub-national finances.

The central thesis is clear: without fiscal discipline and reform at the state level, national macro-stability will remain fragile, regardless of central prudence.

Key Arguments Presented

1. Fiscal Reform Is No Longer a Central-Only Agenda

The article asserts that while the Centre has undertaken major reforms—FRBM frameworks, GST, and expenditure rationalisation—states have not kept pace. With states now accounting for a large share of public debt and expenditure, macro-economic outcomes are increasingly shaped at the sub-national level.

The author stresses that fiscal federalism has matured to a point where states must internalise responsibility for stability, not merely demand transfers.

2. Debt, Not Deficits, Is the Emerging Risk

A key argument is the shift in concern from annual fiscal deficits to structural debt accumulation. High off-budget borrowings, guarantees to state-owned enterprises, and opaque financing mechanisms are flagged as risks that markets and rating agencies are beginning to price in.

The warning is implicit but firm: states cannot assume perpetual central or market bailouts.

3. Conditional Transfers as a Reform Lever

The article highlights the role of Finance Commissions in nudging reform through incentives rather than coercion. Conditional grants linked to fiscal transparency, power-sector reform, and local-body finances are presented as a pragmatic path in a federal polity.

This reflects an argument for cooperative discipline rather than central diktat.

4. Markets and Institutions Are Already Watching

Another important argument is that global investors and financial institutions increasingly evaluate India not just as a sovereign entity, but through the lens of aggregate public finance, including states. Poor fiscal behaviour at the state level can therefore raise borrowing costs for the entire economy.

The message is that fiscal indiscipline has collective national consequences.

5. Political Economy Constraints

While advocating reform, the article acknowledges that state finances are deeply entangled with electoral politics—free power, subsidies, loan waivers, and populist spending. The challenge, the author suggests, is to reconcile democratic pressures with fiscal sustainability.

Author’s Stance

The author adopts a technocratic reformist stance:

  • Strongly pro-fiscal discipline
  • Supportive of rules-based governance
  • Believes incentives and transparency can gradually alter state behaviour

The tone is analytical and cautionary rather than alarmist, but it clearly privileges macroeconomic stability over short-term political considerations.

Implicit Biases and Editorial Leanings

1. Fiscal Orthodoxy Bias

The article reflects a classic fiscal-prudence worldview, prioritising:

  • Debt sustainability
  • Market confidence
  • Rules-based frameworks

This may underplay arguments that counter-cyclical or welfare-oriented spending by states can be developmentally necessary, especially in poorer regions.

2. Limited Social Sector Nuance

While discussing fiscal stress, the article does not sufficiently differentiate between:

  • Productive social spending
  • Wasteful populism

This risks treating all high expenditure as fiscally suspect.

3. Reform-Through-Institutions Assumption

There is an implicit belief that Finance Commissions, markets, and institutions can discipline states, which may overlook political resistance and uneven administrative capacity across states.

Pros and Cons of the Argument

Pros

  • Correctly identifies states as the new frontier of fiscal reform
  • Highlights risks of off-budget borrowing and fiscal opacity
  • Integrates fiscal federalism with macro-economic stability
  • Avoids simplistic blame of either Centre or States alone

Cons

  • Insufficient engagement with developmental asymmetries among states
  • Limited discussion on revenue-raising autonomy of states
  • Does not fully address GST-related constraints on state finances
  • Understates the political cost of reform at the state level

Policy Implications

1. Strengthening Fiscal Federalism

The article implies the need for:

  • Greater transparency in state budgets
  • Clear accounting of guarantees and off-budget liabilities
  • Incentive-linked transfers rather than unconditional bailouts

2. Reforming State-Level Institutions

State public finance management systems, audit mechanisms, and legislative oversight must improve to ensure fiscal responsibility is democratically accountable.

3. Balancing Welfare and Sustainability

Future policy must distinguish between:

  • Growth-enhancing and equity-oriented spending
  • Unsustainable populism that crowds out capital expenditure

Real-World Impact

  • Persistent state-level fiscal stress can raise borrowing costs nationally
  • Poorly managed debt risks crowding out private investment
  • Fiscal crises at the state level can disrupt welfare delivery
  • Market scrutiny may increasingly constrain populist fiscal promises

For citizens, the stakes are high: fiscal irresponsibility today can translate into reduced public services tomorrow.

UPSC GS Paper Alignment

GS Paper II – Polity and Governance

  • Fiscal federalism
  • Role of Finance Commission
  • Centre–State financial relations

GS Paper III – Indian Economy

  • Public finance
  • Debt sustainability
  • Market confidence and investment climate

GS Paper IV – Ethics in Governance

  • Inter-generational equity
  • Accountability in public spending
  • Responsible economic decision-making

Balanced Conclusion and Future Perspective

The article makes a persuasive case that India’s next phase of economic reform must be state-centric. As states command greater fiscal space and political authority, they also bear greater responsibility for macro-economic stability.

However, fiscal reform cannot succeed through discipline alone. It must be accompanied by:

  • Enhanced revenue autonomy
  • Transparent accounting
  • Political consensus on the limits of populism

In the years ahead, India’s growth story will depend not just on what the Centre promises, but on how responsibly states choose to govern their finances.