The fourth wave: The ideal state of State Finances in India

What happens when the pillars of governance are pegged on shortsighted promises? How long can the Indian states balance on the shaky scaffolding of increasing debt and subsidies? And, more importantly, what is the cost of this fiscal myopia, for the generations yet to come?

Many of the Indian states are standing down the barrel of increasing debt, ill conceived, populist policies, often targeted at winning elections, and alarming over dependence on regressive, revenue, streams, and opportunities to build a governance model for the stability of the future.

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Reserve Bank of India in its regular reports has highlighted its concerns around this team. That the states must carve out a credible path for viable finances. While there has been a reduction and debt levels down to 28.5% of GDP in March 2024, from a pandemic peak of 31%, this is not a victory. Some of the states have a dangerous dependence on alcohol revenues, a large contribution to the state exchequer. As convenient as this might seem, it is irresponsible and lazy governance, for the societal toll of alcoholism is terrible. Yet due to inability to build alternate revenue streams, the states have turned a blind eye to its original objective : to uphold social governance.

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What does it tell us about governance? When states depend on their physical survival on the very vices that can grip our society? It also indicates the states’ inaction in developing sustainable revenue models and their short-termism to use politically-driven subsidies. The Reserve Bank of India has flagged repeatedly that many of populist freebies pose a significant risk to fiscal health.

Now let us look at the idea of “one nation, one election”. Can it offer any solution to reining in fiscal discipline across our states? Possibly yes. By aligning elections, both at the central level and the state level, the relentless cycle of populist promises often brought about by scattered election timelines could be synchronised. Such a possibility has the potential to allow the stage to concentrate on long-term developmental goals. Such a change could also channelise resources and political bills into meaningful investments for each state to unlock the latin potential unique to its boundaries.

However, the impact of such a reform would go beyond just about fiscal prudence or administrative convenience. The constant turn of election cycles often hinder the necessary focus and attention on public governance, with policy priorities, often dictated by vote bank appeasement. The synchronisation of elections could break this chain And might offer a better stable political environment. This continuity could also provide the necessary catalyst for intergenerational investments across public infrastructure and services. Such a shift would also require an equally ambitious restructuring of each state vision for itself and also restructuring of its finances and governance frameworks to turn its demographics into a meaningful, economic and social asset.

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Alvin Toffler’s book “Third Wave” described the transition from the industrial age to the knowledge age, where societies organise themselves around ideas rather than just commodities. We observe that India stands at the possibilities of its own “Fourth Wave”, where state finances would be organised around fiscal discipline, sustainability of developmental plans and a long-term human development vision. This would be about moving towards a model that actively leverages the immense talent, natural resources, and demographic potential within each state.

Yet, the larger question remains: is there the intent? Beyond the data, reports, and expert warnings, is there a collective political will across India’s states to step away from this cycle of dependency across electoral campaigns? Or Indian states ready to make the difficult choices, to prioritise long-term suitability of their policies, that would build societies that can thrive on dignity and not on doles?