Both central and state governments havecarried out significant correction of financial imbalancessince 2000, through the implementation of fiscal reformsincluding enactment of fiscal responsibility (FR) acts.However, the improvement in the finances of all states inaggregate hides wide disparities between them. Some stategovernments are already on a sustainable path while someothers are far from it. Some have complied with their FiscalResponsibility acts both in letter and spirit, while othershave accumulated off-budget liabilities to unsustainablelevels, circumventing the FR acts, which did not specifycaps on such liabilities. Moreover, fiscal correction by anIndian state is only a means to an end. The end that is,achievement of development goals-depends on how fiscal spaceis used, or how efficiently the money is spent to produceoutputs and the desired outcomes. A strong fiscalperformance will lead both to an improvement in the overallbalance via improved structure of revenue and expenditures,with incentives in place to ensure sustained fiscalimprovement, and better outcomes associated with budgetoutlays. Note one examines progress with overall fiscalcorrection by Indian states during 2000-06. Note twopresents case studies of fiscal adjustment experience inthree selected states. Finally, note three illustrates howexpenditure efficiency could be measured so as to addressthe challenge of translating outlays to outcomes.
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