Governance & Fiscal Insights

Tag: public policy

  • Beyond Deficit Targets: Re-Engineering India’s Sub-National Public Finance for Growth

    Beyond Deficit Targets: Re-Engineering India’s Sub-National Public Finance for Growth

    For over two decades, the core philosophy of macroeconomic management in India has been guided by a singular mandate: enforce fiscal discipline through strict numerical caps. Enacted through the Fiscal Responsibility and Budget Management (FRBM) Act of 2003 at the national level and subsequent Fiscal Responsibility Legislations (FRLs) across various states, these boundaries were designed to eliminate the “deficit bias” of governments, curb inflation, and secure long-term debt sustainability.


    However, an extensive empirical study by researchers Irsad, Mohd Yousuf Malik, and Syed Hasan Jafar evaluating India’s public finances from 1991 to 2022 exposes a deep structural flaw in this mechanism. The authors demonstrate an institutional “Decentralization Paradox”: while uniform fiscal rules successfully anchor stability at the national level, they create a restrictive trap that suppresses economic expansion at the sub-national (state) level.


    Fortunately, India’s public finance policy is undergoing a massive structural evolution. By connecting the historical baseline of that academic paper with NITI Aayog’s Fiscal Health Index (FHI) 2026, the legislative overhauls of the 16th Finance Commission, and the operational funding of the Central Government’s SASCI Scheme, we can map out how India is successfully shifting from rigid containment to a flexible, growth-centric framework.

    1. The Academic Diagnosis: The Simultaneous Model and the Capex Trap

    To untangle how legislative rules affect different tiers of government, the authors built a comprehensive Fiscal Performance Index (FPI) using Principal Component Analysis. This index aggregates six distinct variables to capture both revenue mobilization and expenditure quality:

    • Positive Indicators (Improve FPI): Own Tax Revenue to GDP/GSDP, Capital Expenditure to Total Expenditure, and Non-Tax Revenue to Total Revenue Receipts.
    • Negative Indicators (Degrade FPI): Fiscal Deficit to GDP/GSDP, Revenue Deficit to GDP/GSDP, and Interest Payments to Revenue Receipts.
      Because economic growth influences fiscal performance, and fiscal performance simultaneously impacts growth, standard statistical models face a “chicken-and-egg” dilemma of reverse causality. To resolve this, the authors deployed a Two-Stage Least Squares simultaneous equation framework. Instead of treating growth and fiscal health in isolation, the framework mathematically isolates the independent impact of legislative rules by controlling for external factors like the Terms of Trade, inflation, total outstanding debt liabilities, labor force expansion, and trade openness.

    The Core Findings:

    • The FPI Divergence (+0.14 vs. -0.04): The implementation of fiscal rules shows a significant positive coefficient of 0.14 with the national FPI, confirming that rules successfully consolidated central public finances. However, at the state level, it yielded a negative coefficient of -0.04, proving that rigid targets strip sub-national governments of the operational flexibility needed to handle local shocks.
    • The Expenditure Compression Trap: The model reveals that strict legislative rules trigger a stark growth penalty—-4.54 for national GDP and -5.09 for sub-national GSDP. When a state faces a revenue squeeze, it cannot easily reduce “committed expenditures” (salaries, pensions, and interest payments). To satisfy statutory deficit limits, it compresses the only flexible buffer available: discretionary Capital Expenditure.
    • The Multiplier Asymmetry (5.23): The framework shows that public investment holds an enormous growth coefficient of 5.23 at the state level, far higher than the 2.01 found at the center. Consequently, forcing states to trim infrastructure outlays directly penalizes long-term economic expansion.
    • Weak Growth Feedback Loops: The model proves that economic growth feeds back into fiscal health at a rate of 0.06 nationally, but a mere 0.01 at the state level. Sub-national governments cannot rely on national growth to clean up their balance sheets; their stability depends entirely on localized expenditure design.

    2. Mapping the Symptoms: NITI Aayog’s Fiscal Health Index 2026

    If the academic paper diagnoses a historical structural disease, NITI Aayog’s Fiscal Health Index (FHI) 2026 provides the active empirical proof. Tracking longitudinal trends over a clear decade-long baseline (FY 2014–15 to FY 2023–24), NITI Aayog organizes its ranking framework around Five Key Pillars that directly correlate with the variables identified by the academic paper.

    Structural Correlation: Academic FPI vs. NITI Aayog FHI 2026

    The Widening Sub-National Asymmetry

    The FHI 2026 results expose a massive divergence among major states, confirming the authors’ warnings about treating unequal states with uniform rules:

    • The Achievers: States like Odisha (which has topped the index for two consecutive years), Goa, and Jharkhand maintain excellent fiscal health. They consistently hold large capital outlays (around 4–5% of GSDP) and robust internal revenues, insulating them from expenditure compression.
    • The Committed Expenditure Trap: At the bottom, states like Punjab (ranking last with a score of 12.4 out of 100), West Bengal, and Kerala face severe fiscal distress. Their committed expenditures (salaries, pensions, and subsidies) absorb an overwhelming 50–60% of their total revenue receipts, leaving virtually zero fiscal space for developmental capex.

    Abandoning Uniformity: The North-East Decoupling

    In a direct implementation of the paper’s primary recommendation to abandon “one-size-fits-all” templates, NITI Aayog’s 2026 index completely decoupled the 10 North-Eastern and Himalayan states from the major states, ranking them on an independent grid. This officially recognizes that unique geographical isolation, sparse populations, and high service delivery costs require distinct, calibrated fiscal baselines.

    3. The Operational Antidote: The GoI’s SASCI Scheme

    To break the “capex compression trap” highlighted in the paper, the Central Government deployed a powerful operational counter-measure: the Scheme for Special Assistance to States for Capital Investment (SASCI).
    First rolled out by the Ministry of Finance in October 2020 during the pandemic revenue shock, SASCI acts as a countercyclical safety valve. It extends 50-year interest-free loans to state governments that are strictly earmarked for capital asset creation.

    How SASCI Resolves the Financial Dilemma:

    • Over and Above Limits: SASCI funds are provided completely outside a state’s normal Net Borrowing Ceiling. When local revenues contract, states can draw down these funds to sustain their core infrastructure pipeline without breaching their local FRL limits.
    • Excluding Revenue Leakage: The scheme explicitly bars states from utilizing these funds to bridge revenue deficits, cover interest burdens, or pay administrative salaries.
    • Targeting Structural Asymmetry: SASCI incorporates dedicated windows like the “Pride of Hills” allocations (safeguarding capital budgets for Himalayan states) and “Unity Malls” funding.
    • Upgrading Digital Governance: Reflecting the paper’s demand for deep public finance IT improvements, Part-IV of the SASCI scheme links funding to the mandatory integration of state treasuries with the Central Public Financial Management System (PFMS), establishing automated, end-to-end digital tracking of asset creation.

    4. The Legislative Overhaul: The 16th Finance Commission (2026–2031)

    While SASCI injects active capital into state budgets, the 16th Finance Commission framework provides the long-term legislative architecture designed to change sub-national incentives for the 2026–2031 allocation period.

    1. Re-Engineering the Devolution Loop: The 10% GDP Weight

    The 16th Finance Commission maintained the vertical devolution share to states at 41%, but introduced a major modification to the horizontal distribution criteria: a 10% weight for a state’s direct contribution to nominal GDP, replacing the older, generic “tax effort” metric. This directly addresses the paper’s finding that growth feedback loops are structurally weak for states (0.01). By rewarding GSDP expansion, the commission ensures that states that drive local economic engines are automatically compensated with a larger share of untied central taxes.

    2. Eliminating the Revenue Deficit Crutch

    The commission has systematically discontinued open-ended post-devolution Revenue Deficit Grants, pivoting central transfers heavily toward Performance-Based Grants. This penalizes states that rely on central adjustments to finance daily operational deficits, forcing them to focus on the paper’s primary positive variable: expanding their Own Tax Revenue.

    3. Clamping Down on Off-Budget Liabilities

    To prevent states from window-dressing their balance sheets, the 16th Finance Commission formalizes strict rules regarding hidden debt. All off-budget borrowings incurred by states through public sector undertakings (PSUs) or special purpose vehicles must be fully adjusted against their Net Borrowing Ceilings under Article 293(3). This creates absolute accounting transparency, forcing hidden liabilities back onto the primary balance sheet and creating a true, verified baseline for macro-fiscal performance evaluation.

    5. The New Era of Fiscal Federalism

    The clear convergence between academic research, NITI Aayog’s diagnostic indexing, and active central policies reveals a significant shift in India’s macroeconomic philosophy. The era of treating deeply unequal states with rigid, identical budget rules is drawing to a close.
    By protecting high-multiplier capital expenditure via SASCI, clamping down on off-budget window dressing, decoupling unique regional economies, and directly rewarding states for their nominal GSDP contributions through the 16th Finance Commission, India is successfully forging a new model of cooperative federalism. This balanced approach preserves macro-discipline at the top while safeguarding the structural growth engines of the states below.

  • Toward More Informed Practitioners in Government

    Why government needs more than routine competence

    One thing I have increasingly noticed in public service is this: meaningful conversations about the larger direction of our domains are surprisingly rare.

    Most practitioners are comfortable discussing a file. We can examine a rule position, debate a procedural issue, clarify an approval path, or draft a response on a pending case. That part of professional life is familiar. It is where most of us operate with confidence.

    But the moment the discussion moves beyond the immediate file and toward the larger direction of the sector, the conversation often becomes much thinner.

    How often do government administrators seriously discuss whether existing policy design is actually likely to produce better outcomes this year? How often do they read implementation frameworks, field studies, or policy papers that test whether current practice is working? How many finance personnel regularly engage with questions of budgeting quality, fiscal design, procurement reform, or better utilisation of public money?

    In my experience, such conversations are rare.

    That absence matters more than it appears.

    The file-centric culture of practice

    Over time, professional life becomes narrowly file-centric. One learns how to process work, but not always how to understand the larger system behind that work.

    A practitioner may become efficient, careful, and procedurally sound, yet remain underexposed to the wider ideas, debates, and frameworks that should improve judgment. In such an environment, disposal improves faster than interpretation. People become good at moving work, but not necessarily at questioning whether the system is producing better outcomes.

    This is not a criticism of practitioners as individuals. In most cases, the issue is structural.

    The system rewards timely handling of work. It does not as visibly reward deeper reading, reflection, or conceptual clarity. Daily office responsibilities consume time. Social media consumes attention. Serious reading becomes a personal choice rather than an institutional expectation.

    As a result, many practitioners remain highly experienced, but not always deeply informed in the evolving sense of the term.

    Why intellectual stagnation is a systemic problem

    The problem is often misunderstood as one of personal discipline alone. It is more than that.

    Government systems are designed to ensure continuity, compliance, and administrative order. Naturally, they create routines. But when routine becomes the dominant professional condition, it can slowly reduce curiosity. The mind adjusts to immediate tasks, recurring formats, and familiar workflows. The incentive is to be safe, timely, and procedurally correct.

    There is value in that. Public administration cannot function without procedural reliability.

    But if the system only values safe disposal and does not create any meaningful rewards for deeper understanding, then intellectual stagnation becomes a rational outcome. Officers may continue to perform their assigned roles well, but their capacity to interpret new challenges, absorb new ideas, and contribute to systemic improvement weakens over time.

    That is a loss not only for individuals, but for institutions.

    Why governments increasingly turn to consultants

    This may also explain why governments increasingly outsource thinking-heavy, design-heavy, and reform-oriented tasks to private consultants.

    This is not necessarily because consultants are inherently more capable than government practitioners. In many cases, government officers possess stronger contextual understanding, legal memory, field exposure, and administrative realism. They understand the lived constraints of departments, field formations, and public systems in ways outsiders often do not.

    Yet consultants usually work in a clearer incentive structure.

    If someone in a consulting firm handles a difficult assignment well, that person is more likely to be trusted with more important work. Capability gets noticed. Better effort has clearer rewards. Reading, analysis, presentation, and structured problem-solving are part of how value is judged.

    In government, that link is often much weaker.

    An officer may read more, think more, reflect more, and become significantly better informed, yet the system may not meaningfully distinguish that officer from someone who merely disposes of routine work on time. Over time, this weakens the incentive for intellectual effort within the system itself.

    What is not cultivated internally is eventually purchased externally.

    The missing layer: knowledge-producing state institutions

    But the issue goes beyond individual incentives.

    At the state level, we rarely have strong institutions that continuously produce useful working papers, policy notes, implementation studies, or practical domain analysis for practitioners. Where such institutions exist, many are primarily engaged in structured departmental training, especially for new entrants.

    Serving officers may occasionally receive a few sessions on recent developments in the department. That may be informative. But it is not the same as creating a living knowledge ecosystem.

    Practitioners do not only need training. They need intellectual support.

    They need institutions that regularly produce grounded, readable, practice-oriented material on administration, finance, budgeting, procurement, implementation, monitoring, and reform. They need short papers that explain new developments in usable form. They need implementation reviews that honestly assess why certain schemes, processes, or reforms are underperforming. They need comparative notes that show what other states, sectors, or countries are doing differently.

    Without such institutions, professional learning remains thin and episodic.

    Why this weakens governance over time

    In the absence of strong incentives and strong knowledge institutions, the system becomes doubly weak.

    Internally, practitioners remain trapped in routine. Externally, governments become dependent on private consultants for the very thinking capacity they failed to build within.

    That creates a deeper institutional problem. The state may continue to retain authority, but it gradually loses some of its in-house ability to diagnose its own problems, frame alternatives, or challenge external advice with confidence. When that happens, outsourcing is no longer just about technical support. It becomes outsourcing of institutional thinking.

    This is not sustainable if governments want stronger internal capacity over the long term.

    A system cannot become wiser merely by processing more files. It becomes wiser when its practitioners are able to connect rules with purpose, expenditure with outcomes, and administrative action with public value.

    What more informed practice would look like

    A more informed practitioner is not necessarily someone who reads everything or speaks in abstract language. It is someone who develops the habit of stepping back from immediate work and asking larger questions.

    Why does this rule exist in its present form?

    What problem was it originally meant to solve?

    Why are outcomes weak despite repeated expenditure?

    Where is implementation failing: in design, incentives, monitoring, capacity, coordination, or political prioritisation?

    What are better systems doing differently?

    What can be adapted, and what cannot?

    These are not academic questions. They are practical questions. In many cases, they are exactly the questions that separate routine administration from meaningful improvement.

    Better governance requires more practitioners who can think in this way.

    What needs to change

    If governments want more informed practitioners, three things matter.

    First, incentives must improve. Systems do not have to become perfectly meritocratic overnight, but they must begin to visibly value intellectual effort, problem-solving, and domain understanding.

    Second, professional spaces must improve. Practitioners need more opportunities for serious domain-level discussion, not just file-level exchange.

    Third, institutions must improve. States need knowledge-producing institutions that do more than deliver structured training. They should produce practical, credible, and accessible analysis that practitioners can actually use.

    Only then can professional life move beyond mere procedural familiarity.

    Conclusion

    A healthy governance system needs more than competent handling of today’s file.

    It needs practitioners who can understand the larger system within which that file exists. It needs officials who are not merely efficient within process, but thoughtful about the purpose, limitations, and consequences of that process.

    At present, that intellectual layer is often too weak. Practitioners are busy, but not always institutionally supported to become more informed. Conversations remain narrow. Incentives remain shallow. Knowledge institutions remain underdeveloped. And the state increasingly depends on external actors to supply capacities it should have been nurturing within its own systems.

    Better governance will not come only from more rules, more reviews, or more outsourcing.

    It will also come from cultivating more informed practitioners.

    That requires a genuine knowledge culture inside government: one that values reading, reflection, discussion, and applied learning as part of professional life itself.

    Only then can routine experience mature into judgment.

    And only then can judgment begin to improve governance.