ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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States against the Wall

All the discussion and all the action to tackle the economic crisis have been at the centre; the states have been sidelined.

In the various debates and discussions that have taken place on how to arrest the slide in the economy, the impact on the states and the role that they can play in tackling this crisis are strangely absent. In particular, the impact of the many rounds of central government tax cuts from December 2008 onwards on state government finances – primarily on their development expenditure and on their economies in general – is unclear.

The tax cuts will, without question, have an immediate contractionary effect on the states since there will be a reduction in central transfers through devolution. A question that needs to be asked is, if the states are forced to follow a contractionary fiscal policy, would that not be counterproductive vis-à-vis the many fiscal expansionary measures proposed by the centre?

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