Do Indian States have the power to devise their own policies? A study on fiscal space

With the decentralization process of the 1990s, linked to economic liberalization, there emerged new decisional scope for regional governments to shape their own policies. Education, health and infrastructures are among the states’ prerogatives. However, the decentralization process remains partial: the macro-economic policies as well as most of the taxing powers continue to be of the responsibility of the Central Government. The delinking of taxing powers and spending decisions has led to important fiscal imbalances in a context of greater competition among the states, each striving to increase its own financial capacities, by attracting private investments for instance.

With these constraints, have the states managed to increase their fiscal capacities to customize their own policies? If so, do we observe any variations in the sectoral priorities of the states in the post-reform period?

Using data on states’ revenue and expenditure compiled by the Reserve Bank of India for the period 1993 – 2003 this paper provides elements to answer these questions.

A close look at the states’ fiscal space show that between 1993 and 2003, states’ spending capacities decreased mostly because of indebtedness. The data also show that the size of a state’s fiscal space does not necessarily depend on its level of wealth. .Under harsh financial constraints, India’s states had to make spending choices – and these choices appeared to differ from one state to another. This partly explains the growth divergence observed by many scholars among states during this period.

Kim Robin graduated in 2010 with a Master’s Degree in International Affairs with a focus on Development Economics from the Institute of Political Studies (SciencesPo Paris). As part of her Master’s, she completed an internship at the Centre de Sciences Humaines (CSH) in Delhi, where her interest in development economics and in Indian political economy led her to take part in the program “Economic Reforms, Regional Economies and Evolving Federal Governance” under the supervision of Loraine Kennedy. As part of the program, she studied the States’ fiscal space in the post-reform period as well as the development strategy of the government of the state of Orissa. She collected primary data through qualitative interviews with government officials and members of the civil society, and to assess the pertinence of the state’s strategy, she conducted an in-depth household survey in two villages (in Puri and Koraput districts). She also studied the correlates of poverty in Orissa for her Master’s thesis. She now works in a consulting company in Paris specialized in social and public health policy.