Orissa, a low income state of India, has been forced to borrow to meet its revenue expenditure requirements during the early 1980s. The fastest growing components of total expenditures were interest, subsidies and other transfers and salaries. Subsidy is an important instrument of state intervention with the objective to raise the level of living of the people and strengthening the market. Given the prevalence of poverty in Orissa & large proportion of socially disadvantaged segments of the population to whom the state is committed to provide social security, the state government provides...