Analysis shows grant-based incentives improve adherence to fiscal rules in states, highlighting effectiveness over borrowing power.
Post the enactment of Fiscal Responsibility Legislations at the State level, successive Finance Commissions have provided incentives to states in the form of grants (FC-XII and FC-XIII) or additional borrowing power (FC-XIV) to encourage compliance with fiscal rules. This paper provides an analysis of the debt profile of major states and examines the operationalization of state-level fiscal rules. Our analysis shows that grant-based incentives have worked better than expanding fiscal space through higher borrowing power. Furthermore, we find that States, in aggregate, have adhered to the debt and deficit targets specified in the fiscal rules for most years.
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Chakraborty et al. (2025) studied this question.
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