The first generation of fiscal reforms in the states started with the enactment of Fiscal Responsibility and Budget Management Acts (FRBMA) between 2006 and 2010 at the prodding of the 12th Finance Commission. This triggered a movement towards fiscal consolidation among all the states which gradually led to substantial improvement of their fiscal parameters. Most states were able to generate revenue surpluses, reversing the earlier trends of soaring revenue deficits, and set themselves on a path of growth by investing these revenue surpluses to create capital assets which hitherto were financed entirely by borrowed capital.

In its recently released report on “State Finances ~ A Study of Budgets”, the RBI has proposed a set of second-generation reforms for fiscal consolidation in the states of India. It includes a set of proposals, including improvement in fiscal marksmanship through adoption of the widely used Public Expenditure and Financial Accountability (PEFA) framework developed by seven international partners including the World Bank, IMF and EU, setting up of state institutions of transformation like the Niti Aayog in every state (seven states have already done so), etc. Here I am highlighting some major areas needing urgent focus. Due to their high indebtedness, by 2000, all the states were on the brink of disaster from which they turned around one by one, with their consolidated gross fiscal deficit (GFD) falling from an average 4.3 per cent of GDP between 1998-99 and 2003- 04 to 2.7 per cent between 2004- 05 and 2023-24, overcoming the massive disruptions caused by the Covid pandemic.

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Their overall debt also declined from 31.8 per cent of GDP in 2003-04 to 28.5 per cent of GDP in 2023-24, though it was still way higher than 20 per cent recommended by the FRBM Review Committee in 2017. But all the states are now again facing financial stress due to the compulsions of electoral politics which are making them spend more or more on freebies in the form of cash transfers.

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Delivering on governance is tough, but delivering on the promises of freebies is easy, thanks to the Direct Benefit Transfers (DBT) effected through Jan-Dhan accounts which ensures seamless transfer of cash without any leak age. Freebies defy all economic logic, and the argument proffered by politicians that they will boost consumption and create a multiplier effect far exceeding the expenditure is an eyewash that fools no one. But voters lack rationality and incentives ~ especially cash incentives ~ work; hence freebies fetch votes. The BJP that had........

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