Fiscal opacity distorts the financial picture that India’s Finance Commissions need to do their role justice

Subscribe to enjoy similar stories.At its core, India’s Finance Commission (FC) is a constitutional mechanism for equalization, ensuring that differences in income across states do not translate into differences in access to basic public services. But equalization is only as effective as the information it uses. When fiscal data is incomplete or opaque, the FC’s recommendations—however well intentioned—risk misallocating resources, weakening incentives and undermining fiscal discipline.Fiscal transparency is foundational to India’s fiscal federal system.

However, India’s public financial management system continues to face persistent data gaps—misclassification of expenditure, incomplete reporting of liabilities, fragmented data across levels of government and limited visibility of off-budget operations. These distort the measurement of fiscal capacity and need. Consider capital expenditure.

A significant portion of reported ‘capex’ consists of financial transactions—loans, equity injections into public entities or transfers through special purpose vehicles. If such spending is treated as capital formation, it inflates the apparent investment effort and obscures expenditure quality.For the FC, this matters directly. If states appear to invest more than they actually do, assessments are distorted and transfers may reward accounting practices rather than asset creation.A similar distortion arises on the revenue side.

Both the Union and some states treat proceeds from asset sales—privatization and just disinvestment—as current revenue. These are one-off capital receipts, not recurring revenue streams. International standards treat them as financing items.