Utilisation of Government Borrowings in Major Indian States

The term sustainability has been used with different connotations under different circumstances in multilateral policy discussions. The fiscal sustainability of state governments is different from that of the central government, due to the differential allocation of powers in the Constitution of India. These legal restrictions leave subnational governments unable to adjust their primary fiscal balances. Yet, state governments, in order to maintain economic stability and achieve economic growth, can manipulate fiscal policy alone as the monetary policy is uniform for all states, in that it is centrally determined. As far as state government finances in India are concerned, sub­national financial sustainability can be understood as the capacity to generate adequate resources to afford their expenses on a sustained basis. This involves two main dimensions: (i) fiscal sustainability, and (ii) debt sustainability. This article focuses on fiscal sustainability.

Fiscal sustainability analysis is an approach linked to intertemporal budget constraints, subject to the condition that current deficits need to be outweighed in the future by surplus (Quintanilla 2009). The borrowing operations of the government should not muddle the objectives of maintaining stability in the economy. In the case of the Indian economy, there is a paucity of resources necessary for development. Revenues, generated by way of taxes, are mostly used for the normal expenditure of the government, resulting in the government’s heavy reliance on borrowed funds to finance development of the economy (Mallick 2005). If the cost or burden of borrowings is offset by the gains received, then the debt would be less burdensome. If the rise in public borrowings is accompanied by a simultaneous increase in productive capacity, investment, asset creation, and national income in the economy, then the debt will not hinder the stability of the economy. Thus, the income-generating effect of public debt makes the rising debt less troublesome (Bhatia 1994).