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18 Jan 2026·Source: The Hindu
3 min
EconomyNEWS

Arvind Subramanian: Centre, States Need to Reduce Fiscal Deficits

Ex-CEA Subramanian advocates for fiscal prudence, especially in welfare schemes.

Arvind Subramanian: Centre, States Need to Reduce Fiscal Deficits

Photo by Jakub Żerdzicki

Arvind Subramanian, former Chief Economic Adviser (CEA) to the Government of India, stated on 17 January 2026, that India's "Kamadhenu-like" fiscal habits are a downside of its "precocious democracy." Speaking at a session titled "India's path to development," he noted that India's government deficit since 1991 has been the highest among comparable emerging market countries, at almost 10% of GDP annually. He attributed this to the accommodation of every societal demand. Subramanian suggested that while hard austerity measures aren't necessary, both the Central and State governments should reduce their deficits, particularly in welfare measures involving cash transfer schemes. He emphasized the need for strong cooperative federalism between the Centre and States for economic development.

Key Facts

1.

India's deficit since 1991: Highest among emerging markets

2.

Annual deficit: Almost 10% of GDP

3.

Need: Centre and States to reduce deficit

4.

Focus: Welfare measures, cash transfer schemes

UPSC Exam Angles

1.

GS Paper III: Indian Economy - Government Budgeting

2.

Connects to Fiscal Policy, FRBM Act, Finance Commission recommendations

3.

Potential question types: Statement-based, analytical questions on fiscal sustainability

Visual Insights

More Information

Background

The concept of fiscal deficit gained prominence in India during the economic reforms of the 1990s, although the practice of government borrowing to finance expenditure existed before. Prior to 1991, India's fiscal management was largely characterized by import substitution and a closed economy, leading to unsustainable deficits. The balance of payments crisis in 1991 forced a shift towards liberalization and a greater focus on fiscal discipline.

The Fiscal Responsibility and Budget Management (FRBM) Act of 2003 was a key milestone, aiming to institutionalize fiscal prudence by setting targets for deficit reduction. However, adherence to these targets has been inconsistent, particularly during periods of economic slowdown or crisis, such as the 2008 financial crisis and the COVID-19 pandemic. The debate continues on the optimal level of fiscal deficit for a developing economy like India, balancing the need for growth-enhancing public investment with fiscal sustainability.

Latest Developments

In recent years, India's fiscal deficit has been a subject of intense debate, particularly in the context of the COVID-19 pandemic and its aftermath. The pandemic led to a significant increase in government spending to support the economy and provide relief measures, resulting in a sharp rise in the fiscal deficit. While the government has committed to fiscal consolidation, the pace of reduction has been gradual, balancing the need to support economic recovery with long-term fiscal sustainability.

The 15th Finance Commission has also made recommendations on fiscal consolidation roadmaps for both the Centre and the States. Furthermore, there is an ongoing discussion on the appropriate level of public debt and the role of counter-cyclical fiscal policy in managing economic fluctuations. The focus is shifting towards improving the quality of government spending and enhancing revenue mobilization to achieve sustainable fiscal outcomes.

Practice Questions (MCQs)

1. Consider the following statements regarding the Fiscal Responsibility and Budget Management (FRBM) Act, 2003: 1. The FRBM Act mandates the central government to reduce the fiscal deficit to 3% of GDP. 2. The Act provides escape clauses that allow deviations from the fiscal deficit target under specific circumstances. 3. The FRBM Review Committee, headed by N.K. Singh, recommended replacing the fixed fiscal deficit target with a debt-to-GDP ratio target. Which of the statements given above is/are correct?

  • A.1 and 2 only
  • B.2 and 3 only
  • C.1 and 3 only
  • D.1, 2 and 3
Show Answer

Answer: D

All three statements are correct. The FRBM Act does mandate a fiscal deficit target, provides escape clauses, and the N.K. Singh Committee recommended a shift to a debt-to-GDP ratio target.

2. In the context of fiscal federalism in India, which of the following statements is NOT correct? A) The Finance Commission recommends principles governing the distribution of tax revenues between the Centre and the States. B) The Goods and Services Tax (GST) Council is a constitutional body that makes recommendations on GST rates and exemptions. C) States have the power to levy taxes on agricultural income. D) The Central government is solely responsible for managing the public debt of the States.

  • A.The Finance Commission recommends principles governing the distribution of tax revenues between the Centre and the States.
  • B.The Goods and Services Tax (GST) Council is a constitutional body that makes recommendations on GST rates and exemptions.
  • C.States have the power to levy taxes on agricultural income.
  • D.The Central government is solely responsible for managing the public debt of the States.
Show Answer

Answer: D

The Central government is not solely responsible for managing the public debt of the States. States also have a role in managing their own debt, subject to certain regulations and guidelines.

3. Which of the following measures can help in reducing the fiscal deficit of a country? 1. Increasing government expenditure on infrastructure development. 2. Reducing subsidies on essential goods. 3. Increasing tax revenue through improved tax administration. Select the correct answer using the code given below:

  • A.1 and 2 only
  • B.2 and 3 only
  • C.1 and 3 only
  • D.1, 2 and 3
Show Answer

Answer: B

Reducing subsidies and increasing tax revenue will help in reducing the fiscal deficit. Increasing government expenditure on infrastructure development, without a corresponding increase in revenue, will increase the fiscal deficit in the short term.

4. Assertion (A): High fiscal deficits can lead to inflationary pressures in the economy. Reason (R): Increased government borrowing to finance the deficit can crowd out private investment and increase interest rates. In the context of the above, which of the following is correct? A) Both A and R are true and R is the correct explanation of A. B) Both A and R are true but R is NOT the correct explanation of A. C) A is true but R is false. D) A is false but R is true.

  • A.Both A and R are true and R is the correct explanation of A.
  • B.Both A and R are true but R is NOT the correct explanation of A.
  • C.A is true but R is false.
  • D.A is false but R is true.
Show Answer

Answer: A

Both the assertion and the reason are true, and the reason correctly explains why high fiscal deficits can lead to inflationary pressures. Increased borrowing can lead to crowding out and higher interest rates, contributing to inflation.

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