Breaking Down the Debt Reduction Success in Four States

In a remarkable financial turnaround, Gujarat, Odisha, West Bengal, and Maharashtra have successfully lowered their debt to gross state domestic product (GSDP) ratio over the past ten years, according to a recent study. This achievement stands in stark contrast to the fiscal challenges faced by Punjab and Tamil Nadu, which have seen their debt levels soar.

The Role of the Finance Commission Under Scrutiny

The study, conducted by NCAER economist Barry Eichengreen and Poonam Gupta, suggests a reevaluation of the Finance Commission's role. It highlights the need for incentivizing fiscal responsibility among states and proposes mechanisms to prevent moral hazard, where states with larger revenue deficits receive more resources.

Proposing a Fiscal Grand Bargain

Amidst the backdrop of political parties distributing freebies and subsidies, the paper advocates for a fiscal 'grand bargain.' This would involve providing debt relief to heavily indebted states in exchange for enhanced Central government oversight and a temporary reduction in fiscal autonomy. The establishment of independent fiscal councils in states is also recommended to ensure realistic spending and revenue projections.

Strategies for Fiscal Improvement

To combat excessive budget deficits and debt increases, the study recommends a forensic analysis to identify specific revenue shortfalls or expenditure overruns. Furthermore, it emphasizes the importance of improving revenue mobilization through digitalization, administrative streamlining, and broadening the tax base. Increasing privatization receipts and reorienting spending towards capacity and infrastructure-enhancing investments are also key strategies proposed.