Indian state finances will not improve without reform

Subject

State finances in India.

Significance

A recent report by the Reserve Bank of India (RBI) highlights a sharp deterioration in the fiscal position of India's state governments, with their collective deficit increasing to 3.6% of GDP in 2015-16 and 3.4% in 2016-17 from 2.6% in 2014-15. Together with central government borrowings, these push India's total fiscal deficit above 7% of GDP, but the deteriorating position of the states is especially significant because they figure prominently in Prime Minister Narendra Modi's strategy for economic development.

Impacts

• A states-led increase in the fiscal deficit may prompt a downgrading of India's sovereign credit rating.
• If state government finances become overstretched, there may be threats to health and education services.
• An increased debt burden may bring greater pressure to bear on infrastructure, especially electricity.