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Budget Rules, Fiscal Consolidation and Government Spending:Implications for Federal Transfers

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  • Pinaki, Chakraborty

Abstract

This paper examined the nature of fiscal consolidation during the era of rule based fiscal control in states and its implications for federal transfers. The analysis revealed that improvement in fiscal balance has been associated with increasing disparities in developmental spending across states. The econometric estimates in panel data also showed that Fiscal Responsibility Act not having any positive and significant impact on development spending when controlled for revenue effect of VAT and increased central devolution. The result seems robust, as this has been corroborated by the exploratory data analysis even when off budget spending is added with the per-capita development spending of the states. When we compared between social and economic services, the disparity in spending is sharper in social sector vis-à-vis economic services. Given this widening disparities in spending the paper emphasizes on the need for equalization grants and estimates the resources requirement for complete equalization of specific services based on the partial equalization of scheme of transfer proposed .

Suggested Citation

  • Pinaki, Chakraborty, 2008. "Budget Rules, Fiscal Consolidation and Government Spending:Implications for Federal Transfers," MPRA Paper 30938, University Library of Munich, Germany, revised 2011.
    • Handle: RePEc:pra:mprapa:30938
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    File URL: https://mpra.ub.uni-muenchen.de/30938/1/MPRA_paper_30938.pdf
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    References listed on IDEAS

    as
    1. Mr. Ananthakrishnan Prasad & Mr. Adarsh Kishore, 2007. "Indian Subnational Finances: Recent Performance," IMF Working Papers 2007/205, International Monetary Fund.
    2. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(2), pages 277-297.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Fiscal Consolidation; Fiscal Responsibility Act; Deficits; Fiscal Equalization;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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