India: redesigning fiscal federalism after the global financial crisis

Author name: 
Raghbendra Jha,

Partly as a result of the Fiscal Responsibility Act (passed in 2003) the gross fiscal deficits of both central and state governments were in good order. Indeed, both central and state governments were running primary surpluses in 2006-07 and 2007-08. Partly as result of the stimulus enacted to counter the effects of the Global Financial Crisis (GFC) both central and state government have been running primary deficits since 2008-09 as a result of which gross fiscal deficits and debt have risen significantly. At the same time individual states (particularly those that were previously lagging) have provided substantial impetus to the growth of the national economy. Against this background this paper addresses three themes: (i) How should fiscal relations between centre and states be re-organized to further enhance aggregate economic growth? (ii) How should the structure of transfers between centre and states be reorganized to get back to the pre-GFC path of fiscal deficits. (iii) How should indirect tax reform, in particular the introduction of the GST, be handled?

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