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Fiscal dominance in India: an empirical estimation

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  • Anshuman Kamila

    (Ministry of Finance)

Abstract

Theoretical works have pointed at the potentially damaging impacts of fiscal dominance, i.e. fiscal authority’s profligacy being accommodated by the monetary authority. Recent scholarship have highlighted to the contrary the arguably positive effects of such accommodation under certain circumstances. Ergo, a surgical snipping of the cord of joint working of monetary and fiscal policy for all times is not advisable. This paper examined fiscal dominance in the Indian context by measuring the impact of Centre’s primary fiscal balance on real interest rates and real GDP growth rate in the Vector Error Correction Model (VECM) framework. It was observed that an improvement in fiscal balance had a positive impact on real interest rate prior to 2003, and in the subsequent periods it turned negative. With regard to the impact of primary fiscal balance on real growth rate, it was observed that the period of 1978–2003 remained a period of dominant fiscal presence and an improvement in fiscal balance—i.e. a reduction in fiscal deficit—had a positive growth effect. In the period following 2003, there was no evidence of fiscal dominance in the Indian economy.

Suggested Citation

  • Anshuman Kamila, 2022. "Fiscal dominance in India: an empirical estimation," Indian Economic Review, Springer, vol. 57(1), pages 113-132, June.
    • Handle: RePEc:spr:inecre:v:57:y:2022:i:1:d:10.1007_s41775-022-00133-0
    DOI: 10.1007/s41775-022-00133-0
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    1. Lidiema, Caspah, 2024. "Monetary-fiscal policy interdependence and pricing dynamics: Empirical estimation of fiscal dominance in Kenya," KBA Centre for Research on Financial Markets and Policy Working Paper Series 83, Kenya Bankers Association (KBA).

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    More about this item

    Keywords

    VECM; Cholesky impulse response; Fiscal dominance; FRBM;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus

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