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Threshold level of fiscal deficit: revisiting FRBMA limit in Indian states

Author

Listed:
  • Dinabandhu Sethi

    (CEFT, Xavier University)

  • V. V. Subba Rao

    (CEFT, Xavier University)

  • Asit Ranjan Mohanty

    (Xavier University)

Abstract

This paper examines whether the fiscal deficit limit of 3% as prescribed by the FRBMA is justified keeping in mind the increasing spending requirement and economic growth of Indian states? The study uses a panel data framework of taking sixteen non-special category states of India for the period over 2001–2002 to 2016–2017. This paper is the first of its kind that uses a threshold regression model due to Khan and Senhadji (IMF Staff Papers 48(1):1–21, 2001) to find the threshold level of fiscal deficit. The empirical findings show that the threshold level of fiscal deficit in sixteen states taken together is found to be 3%, which is in the line of prescribed limit of FRBM act. But at disaggregated level, it is observed that in middle- and low-income states the threshold level of fiscal deficit is 3.9% and 3.5%, respectively. This suggests that states can go for some additional percent of fiscal deficit above the limit prescribed by FRBMA. Therefore, the fiscal deficit limit of 3% needs to be revisited to give more fiscal room to the Indian states.

Suggested Citation

  • Dinabandhu Sethi & V. V. Subba Rao & Asit Ranjan Mohanty, 2020. "Threshold level of fiscal deficit: revisiting FRBMA limit in Indian states," Journal of Social and Economic Development, Springer;Institute for Social and Economic Change, vol. 22(2), pages 233-249, December.
    • Handle: RePEc:spr:jsecdv:v:22:y:2020:i:2:d:10.1007_s40847-020-00100-6
    DOI: 10.1007/s40847-020-00100-6
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    More about this item

    Keywords

    Fiscal deficit; Threshold regression; FRBM rule; Economic growth;
    All these keywords.

    JEL classification:

    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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