An empirical analysis of the finances of the Indian union government

In this paper, a trend analysis of fiscal deficits is done and impacts of various reforms for fiscal consolidation are studied. Trends of government finances in India since 1980s have remained a cause of worry. In the latter half of the eighties, fiscal and revenue deficits were in the range of 7–8 and 2–3 percent of the GDP. Fiscal consolidation was, hence, a major focus of the reform process introduced in 1991–92. The nineties had also seen varied performance of the deficit indicators. In the early nineties, there was a decline in the deficits. However, during the latter half of the nineties and the early 2000s the deficit indicators climbed back to near-about their mid-eighties levels. Fiscal Responsibility and Budget Management Act was adopted in 2003 with the focus on tax reforms, expenditure management, restructuring of PSUs and better co-ordination between monetary and fiscal policies. Post these reforms the fiscal status of India had improved. Again in 2008–09, the deficits widened because of the global financial crisis. With the recovery of the economy, on the path of fiscal consolidation, the deficits have shown some improvements in the recent years.

The study is based on secondary data collected from the various issues of Reserve Bank of India Bulletin, Reports on Currency and Finance, Economic Surveys and various reports of the Ministry of Finance. The study regresses Fiscal Deficit to GDP (at market price) ratio against various components of deficits to find out the impact of these variables on fiscal balance. An empirical analysis of the finances of the Indian union government show that deficits could be controlled by cutting down the expenditures, as the revenue enhancement was not happening. Thus, there is a need for reforming and restructuring the economy.