Indeed, the combined fiscal deficit of the Centre and States was higher in 2001-02 than that in 1990-91. Since 2002-03 onwards, public finances have witnessed a significant improvement, reflecting both policy efforts at fiscal consolidation as well as the upturn in economic activity (Table 1).
Now, if the arrangements that are in place do not work properly, the financial system can turn into a channel through which shocks are amplified as they are transmitted from one part of the system to the next and also beyond national borders.