Fiscal deficit, public debt and reforms-A study of subnational finances in India: 1980–2013

This paper examines empirically the fiscal performance of the subnational governments in terms of sustainability offiscal health and debt dynamics of the non-special category states in India since the early 1980s. The long run debt-deficit behaviouris analysedto examine the sustainability of the fiscal position with in the framework developed by Domar (1944) on the basis of Keynes’ approach to public debt. We have looked into the behaviour of government borrowing by decomposing government expenditure into productive and unproductive components. The problem of public debt at the subnational level in our study is investigated in terms of the ability of public borrowing to enhance economic growth. The most popular way to stabilise high debt ratio is to create primary surpluses through restrictive fiscal policies. We have shown that this is not the only possible policy prescription. A panel analysis for the 17 non-special category states over 1980–2013 indicates that apart from the budget structure, the state specific factors affecting fiscal performance plays an important role in government borrowing. Curiously enough, government borrowing is more responsive to revenue expenditure than capital outlay and also government borrowing has more growth-augmenting effect through revenue expenditure.