Fiscal Policy

The soundness of state finances is vital for both economic and political reasons. It may be time for the Centre to consider various incentives to ensure that state budgets do not go haywire. Here are some that could prove effective.

The Constituent Assembly vested extraordinary powers in the Centre on a grand bargain of power-sharing with Indian states. However, the 16th Finance Commission shifts the balance of power to the Centre. Where does that leave India's ethos of fiscal federalism?

The state’s new department for the elderly is an idea other Indian states faced with the challenge of a dropping fertility rate and an ageing population would need to adopt. As India’s demographic profile shifts, fiscal plans for tomorrow’s needs must start today.

India's proliferation of centrally sponsored schemes over the decades has left us with an unwieldly maze. Few can be justified by their impact. Here’s how the country can put them to test. Many would need to be either reformed or dropped.

The Centre has been relying on the central bank’s surplus transfers to keep its fiscal deficit in check. This year’s transfer for 2025-26 may be even larger than last year’s record ₹2.7 trillion payout. The danger is what this reliance says about RBI independence.

Fiscal transparency is a must at every level of budget making in India for Finance Commissions to devolve the central pool of tax revenues appropriately among states. Unfortunately, Indian data does not always offer the requisite clarity. Here’s what must change.

India’s most populous state has avoided 'freebies' like unconditional cash transfers and maintained a steady revenue surplus. While other Indian states get more handout-happy, UP has shown a rare restraint that others could learn from.

The 16th Finance Commission’s report reveals a centrist bias in vertical tax devolution, its tax-sharing formula among states and its critique of freebies focused just on state-level handouts. Overall, India’s poorer states will lose out as efficiency gets the better of equity.

Washington’s fiscal path looks increasingly unsustainable, but investors have largely looked the other way. A reckoning may come if the Federal Reserve loses its independence—drawing bond market vigilantes back and pushing interest rates sharply higher.

Economists say Indian consumers are unlikely to immediately feel the impact of soaring crude prices following the US-Israel-Iran war.