Fiscal federalism Under India’s federal system of government, the Constitution allocates the revenue powers and expenditure functions between the Central and State Governments. The borrowing by the sub-national governments is in effect subordinated to prior approval by the national government. Furthermore, State Governments are not permitted to directly borrow externally.
The fiscal management in the country has significantly improved, specially, after the adoption of the Fiscal Responsibility and Budget Management Act, 2003 by the Central Government. The State Governments are also adopting similar Acts and have made consistent efforts to improve fiscal management.