India's Fiscal Situation: Is a Crisis Ahead?

Although, on the surface, the achievements of the Indian economy during the past two decades paint a comforting macroeconomic picture, the accompanying rapid expansion in fiscal deficits is unsustainable. The current fiscal problems existing in the states can be attributed to the increasing subsidies on publicly supplied goods and services, inter-state competition in attracting investment through tax incentives, and overstaffing of administrations and public enterprises. The federal structure of India’s fiscal system also implies difficulties in improving the states’ finances. After discussing ways to reform taxes and expenditure, this paper identifies high explicit and implicit subsidies as a major cause of the fiscal problems at the central and state level. Reducing these subsidies requires far-reaching changes in the domestic political economy. The paper also analyzes the fiscal impact of disinvestment. To achieve the goals of development, fiscal sustainability is indispensable. Although there are some positive signs, a political consensus on and commitment to fiscal reform are yet to emerge.