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Subnational level fiscal health in India: stability and sustainability implications

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  • Nimai Das

Abstract

Fiscal health of subnational governments is a priority area of concern in the contemporary policy debate in India. The central government has recently announced that Kerala, Punjab and West Bengal are fiscally unsound at the level of general category states. The study reviews this projection by recent and long-term trends of basic fiscal variables, and then assesses their financial stability and sustainability along the debt–deficit spiral over time. We found that a sharp rise in the revenue account gap caused fiscal deficit to grow steadily and hence a high-flying outstanding debt in all states during late 1990s to early 2000s. This enormous stock of debt emerged as a higher deviation of actual primary deficit from its stability level. Given that the rate of interest exceeded growth of output during this period, it increased debt stock above the level of primary deficit. Furthermore, none of the states accomplished fiscal sustainability fully. Excepting West Bengal, they attained partial sustainability as their debt–deficit system slowly restores the long run equilibrium. West Bengal is far away from sustainability because its future surpluses are not enough to service the debt. The study suggests that a sound adjustment in fiscal position on revenue account is essential for all states and that West Bengal needs a special attention to achieve the equilibrium in long run. Copyright Springer Science+Business Media New York 2015

Suggested Citation

  • Nimai Das, 2015. "Subnational level fiscal health in India: stability and sustainability implications," Economic Change and Restructuring, Springer, vol. 48(1), pages 71-91, February.
    • Handle: RePEc:kap:ecopln:v:48:y:2015:i:1:p:71-91
    DOI: 10.1007/s10644-014-9157-z
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    2. Das, Nimai, 2016. "Federal Fiscal Transfers on Health: Implications of Fourteenth Finance Commission Recommendations at Subnational Level," MPRA Paper 79627, University Library of Munich, Germany.

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    More about this item

    Keywords

    Indian state; Government solvency; Long run equilibrium; Budgetary deficit; Public debt; Fiscal policy; C22; E62; H72; H74;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
    • H74 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Borrowing

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