introduction

 A sub national entity : an administrative

region within a country on an arbitrary level
below that of the sovereign state.

 Investment spending : spending on

productive physical capital.

 It is a volatile component of aggregate

demand depending upon rate of return.
A brief overview
 India follows a hard budget constraint.

 Aspects like subjecting state borrowings to central

government approval and precluding states'
access to financing either from external markets or
from their own banks support this argument.
Results of hard budget constraint
 Gives the control in hands of central govt.

 It does have some negative aspects like

fiscal deterioration at the state level ,
worsening composition of expenditure,
salaries, subsidies and interest payments
crowding out non-wage Operations,
Maintenance and capital spending.

 Therefore sometimes need has been felt to

adopt a soft budget constraints.
Autonomy at sub-state level
 There is is limited decentralization beyond state level.
 Role of gram panchayats in spending on local needs
and priorities not recognized.
 Gram Panchayats investment was restricted due to
limited availability of funds and autonomy.
 State autonomy to spend is not passed down to
municipalities.
 Municipal governments continue to depend on revenue
transfers from state governments.
 Steps to augment the power of lower levels of
governments have added positive chapters to the
evolving store of local credit in India
Present scenario
 Debt market dominated by central government and
public enterprises.
 State and municipalities have turned to financial
intermediaries for funding for urban infrastructure.
 Municipal urban development fund have facilitated
municipal borrowing though its scope and depth
limited by its reliance on state grants for funding.
 Smaller municipalities have limited access to the
funds and so limited public spending and limited
development of infrastructure.