Fiscal Legislation, Debt Management and Social Spending : A State-Level Analysis in India

The implementation of Fiscal Responsibility and Budgetary Management (FRBM) Act led to a conflicting trade-off between fiscal discipline and social sector spending. The scenario was expected to be even worse at the state level, given the imbalance between responsibilities and revenue of the states. This led to a legitimate intellectual apprehension fearing that the states may resort to a deliberate slashing of vital capital and social sector expenditures to maintain fiscal equation. The current study is an addition to the literature along the same line wherein we have tried to highlight the effects of fiscal rule on the fiscal discipline and thereby on social spending in Indian states. A majority of the states were found to have experienced more fiscal impotence in the post-reform period, especially post global melting down of 2008. On average, the states exhibited a conflicting scenario between social spending and fiscal potency, though with some variability between general and special category states. Further, the states are found to rely on deficit financing for their social sector spending mainly. The broad conclusion emerged thereupon was that states in the Indian federation, to maintain their fiscal commitment as mandated by FRBM, have resorted to slashing of social sector spending