Methodological Framework for the Assessment of State Finances in India

Abstract

This paper develops a comprehensive methodological framework for assessing state finances in India, aiming to provide a unified tool for evaluating revenue performance, expenditure efficiency, transfer dependency, and debt sustainability. The study integrates classical concepts such as tax buoyancy, elasticity, and tax effort with contemporary approaches including welfare-based taxable capacity and efficiency-oriented expenditure analysis. Using trend and composition analysis, regression-based tax capacity models, representative tax systems, and debt sustainability indicators, the framework systematically examines the fiscal health of states. Illustrative applications demonstrate how the framework can distinguish between structural and policy-driven revenue growth, assess the effectiveness of expenditure allocation, and measure reliance on central transfers. The findings suggest that states with higher tax effort, balanced expenditure patterns, and lower dependency on transfers exhibit stronger fiscal autonomy and sustainability. Overall, the study provides a practical and standardized toolkit for researchers and policymakers to analyze state-level fiscal performance, offering evidence-based insights for improving fiscal management and policy interventions in India.