Indian federalism beyond the financial crisis

Partly as a result of the Fiscal Responsibility and Management Act (enacted in 2003) the gross fiscal deficits of both central and state governments were in good order prior to the 2008–9 financial crisis. Indeed, both central and state governments were running primary surpluses in 2006–7 and 2007–8. 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 2008–9, 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 chapter addresses three themes: (1) how fiscal relations between centre and states should be reorganized to further enhance aggregate economic growth; (2) how the structure of transfers between centre and states should be reorganized to return to the pre-GFC path of fiscal deficits; and (3) how indirect tax reform, in particular the introduction of the goods and services tax (GST), should be handled.