This paper presents a framework for subnational fiscal sustainability analysis and emphasises the differences between fiscal adjustment at the national and subnational levels. Using the case of Tamil Nadu that experienced an unprecedented fiscal deterioration - a part of the widespread fiscal stress in Indian states in the late 1990s - the analysis attempts to take into account uncertainty and discusses the key components of the state's fiscal accounts and how they respond to reforms and shocks. It illustrates that risks to the state's fiscal outlook include interest rate shocks, pressures on the primary balance, and contingent liabilities, reflecting the interplay of subnational and national policies. The analysis is relevant for other Indian states and countries.
