Fiscal rules and social sector sustainability in India: A cross state analysis

This research paper aims to explore the empirical evidence of the fact that the social sector bears the cost of an imbalanced and unstable fiscal regime. The study used the Dynamic panel model also known as the GMM-SYS model that contains both the levels, the first difference equations and solves the endogeneity, heteroscedasticity and serial correlation problems in the static panel data. The study found that whenever there is a reduction in fiscal deficit from the threshold limit, in Indian states the expenditure on the social sector increases significantly. The study reveals that the fiscal deficit below 3.3 percent of GDP along with non-developmental expenditure and reduction in debt has a positive impact on overall spending on the social sector in Indian states. The study safely argued that fiscal rules are instrumental for the fiscal sustainability regime of Indian states and social sector has to pay for the smooth functioning of such regime. Ho wever, the implications are pivotal for all those states that lack basic social sector infrastructure and indicate them to focus on stable fiscal regime for sustainable social development. This paper is first of its kind in the Indian context to analyse the data of 26 states and use approach to unleash the behavior of social sector on the fiscal front.