-Limabenla Jamir
Nagaland stands at a critical fiscal juncture. For decades, the state has depended on a combination of modest local revenue and central government support to fund its day-to-day operations, with Post-Devolution Revenue Deficit Grants playing a particularly important role in bridging gaps between expenditure and revenue. Earlier this February, alongside presenting the Union Budget for 2026-27, the Central government released the report of the 16th Finance Commission, which will guide fiscal transfers through 2030-31. Constituted every five years under the Constitution, the Finance Commission determines how national tax revenues are divided among the Union, state governments, and local bodies, shaping the flow of resources across all tiers of government.
From April 2026, when the current award period concludes, this structured support for Nagaland will change: the 16th Finance Commission has recommended discontinuing theseRevenue Deficit Grants entirely for 2026-31, shifting instead toward performance-based incentives. As a result, future spending choices will demand even greater fiscal planning, prioritization, and disciplined management at the state level.
A Fiscal Turning Point
To understand the scale of the issue, consider a simple number. In 2023-24, Nagaland’s own revenue was approximately 5.5 per cent of its Gross State Domestic Product (GSDP). In other words, for every ₹100 generated in the state economy, the government collects only about ₹5.50 through its own sources such as taxes, fees, and other revenues.Some neighbouring states such as Assam and Meghalaya mobilize slightly higher shares, while several larger states mobilize substantially more. Differences across states are shaped by economic structure, administrative capacity, and revenue effort all of which matter for long-term fiscal sustainability.
A large share of Nagaland’s total revenue comes from central transfers, including tax devolution and grants. This reflects both the design of India’s fiscal federal system and the structural constraints faced by smaller and special category states. At present, close to 85 per cent (approximately) of the state’s revenue receipts come from central transfers. This has provided stability, but it also creates vulnerability. If transfers slow or change in design, the impact is immediate. High dependence reduces fiscal flexibility, limits long-term planning autonomy, and constrains the state’s ability to independently prioritise development expenditure.
The framework of the 16th Finance Commission, reinforces an evolving fiscal environment in which states are expected to strengthen their own revenue capacity alongside central support. While states continue to receive 41 per cent of the divisible tax pool, performance, fiscal discipline, and economic growth increasingly shape long-term outcomes. For the first time, a state’s contribution to national Gross Domestic Product (GDP) has been assigned a 10 per cent weight in horizontal devolution. The Commission has described this as a gradual and directional shift rather than a drastic restructuring. Traditional criteria such as income distance, population, and area remain significant. Nonetheless, the inclusion of GDP contribution signals that economic performance and contribution to national output will increasingly form part of the fiscal architecture.
For a state like Nagaland, with a relatively small contribution to national GDP, strengthening internal revenue systems and economic activity becomes even more important. The Commission has also emphasised the need for fiscal discipline, including curbing off-budget borrowings. Across states, the broader message is clear, fiscal space will not expand indefinitely. Structural reforms at the state level will increasingly determine fiscal sustainability.
Debt, Deficits and Shrinking Fiscal Space
Debt levels further underline the urgency. In 2023-24, Nagaland’s outstanding debt stood at approximately 44-45 per cent of GSDP, as reflected in recent Union Budget documents and the state’s own evaluation of finances. The state’s Fiscal Responsibility and Budget Management (FRBM) framework recommends a debt level closer to 40 per cent of GSDP. Current levels therefore remain above the state’s own medium-term target. Although the state has maintained revenue surpluses in recent years, much of this cushion has been supported by central transfers rather than strong internal revenue growth. The fiscal deficit and rising debt levels indicate tightening fiscal space. Borrowing continues to finance capital expenditure and deficit gaps, placing upward pressure on long-term debt sustainability.
A large portion of expenditure goes toward committed liabilities, that is salaries, pensions, interest payments on debts, and administrative costs. These are necessary and legally binding. However, when revenue growth is modest and committed expenditure is high, fiscal space for capital investment shrinks. That is when infrastructure projects are delayed, maintenance is deferred,and development programmes struggle to scale.
Fiscal stress rarely appears dramatic. It shows up gradually: in delayed road repairs, strained district hospitals, postponed scholarships, and municipalities struggling to maintain drainage or water systems. Over time, this quiet strain can erode public trust and developmental momentum.None of this suggests inevitability. But it does raise a question: who will make the hard fiscal choices, and when?
Reform Begins Where Policy Is Lived
Reform is not about doing everything at once. It is about choosing what to do first. At this moment, Nagaland does not lack ideas. Economists from Nagaland have proposed infrastructure expansion, industrial growth, renewable energy, tourism development, and sectoral investments. Fiscal strategies and reform roadmaps already exist within government planning processes. What now requires equal attention is institutional readiness and sequencing.
If fiscal reform does not begin at the local level, it risks remaining abstract. Village Councils, Urban Local Bodies, and district administrations are where fiscal policy becomes lived reality. Do local bodies maintain updated asset registers? Traditional authority and community legitimacy in Nagaland’s villages are strong and deeply valued. But do the Village Councils and the urban local bodies have the administrative capacity and political autonomy? Are village councils trained in financial management, procurement standards, and transparent reporting? Do municipalities have reliable property tax systems?
At the same time, there is an unprecedented opportunity for Nagaland’s urban local bodies. The 16th Finance Commission has allocated historic grants to smaller towns and cities, much of it untied, giving local authorities the power to plan and invest according to community priorities. But this opportunity will only be realised if state governments enable rural and urban local governments through strong project design, transparency, and institutional support. These grants are not just funds; they are a test of our local capacity and a chance to show that fiscal reform can deliver visible improvements in citizens’ lives.
Fiscal capacity is not only about raising revenue; it is about managing public money well at every tier. In many ways, fiscal reform is invisible infrastructure. And it is often politically unglamorous requiring legislatures to make challenging choices and prioritize long-term stability over short-term popularity.There is also a broader economic dimension. Stronger fiscal health improves negotiation leveragewith the Union government. States that demonstrate revenue effort, administrative discipline, and credible reform pathways are better positioned when negotiating grants, borrowing space, or special assistance. Reform also expands borrowing headroom in the long run. When deficits are contained and debt stabilises, states gain more flexibility to invest in infrastructure and growth.
The Hard Choices Ahead
However, we must acknowledge a difficult social reality of Nagaland. A significant portion of the government expenditure goes toward salaries and pensions. If fiscal pressure increases and revenue growth does not accelerate, expansion of government employment will naturally slow. This is not an ideological position; it is arithmetic. For many young people in Nagaland and across generations, government employment has historically been a primary aspiration. The ideal dream job. Fiscal transition may require broader conversations about private sector development, entrepreneurship, and diversified employment pathways.Preparing society for this shift is part of reform.
Fiscal reform fails when citizens do not understand why it matters. If reform is perceived only as cuts, restrictions, or constraints, resistance is natural. But if it is understood as a strategy to protect long-term development, preserve autonomy, and strengthen future opportunity, the conversation changes.
The next phase of Nagaland’s fiscal journey is therefore not only technical; it is institutional and political. It involves sequencing reforms, strengthening local capacity, communicating transparently, and building public understanding across every tier of the government.The question is not whether Nagaland should invest in roads, power, tourism, or industry. Those ambitions are legitimate. The deeper question is whether the fiscal foundation supporting those ambitions is strong enough.
Hard choices do not always mean dramatic cuts. Often they mean prioritising maintenance before expansion, improving systems before announcing new schemes, and strengthening institutions before scaling spending.We are at a good transition point. The direction taken now will shape fiscal autonomy for the next few decades.Nagaland has navigated complex political and economic challenges before. Fiscal reform need not be viewed as crisis management. It can be framed as institutional strengthening, reinforcing the invisible systems that allow visible development to occur.
Who will make these choices? Ultimately, elected leaders will decide. But civil society, administrators, and citizens all play a role in shaping the environment in which those decisions are made.The conversation must begin early, and it must be honest. Because fiscal reform is not simply about balancing books. It is about preserving the state’s ability to choose its own future.
-Limabenla Jamir