Online published on 28 February, 2020.
The state level fiscal reforms in India for achieving the overall fiscalsustainability assumes significance, as a major portion of combined expenditure is undertaken by the State governments. To have higher growth trajectory in Indian economy, the fiscal reformsat the State Government level arevery crucial. In the recent years the sustainability of fiscal policy at the state level in India has attracted a major attention both from researchers and policy makers.
The FRBM Act was implemented in Odisha in June, 2005. FRBM Act, 2005 stipulates ceiling for fiscal deficit at 3% of Gross State Domestic Product (GSDP) and zero percent floor for revenue surplus for fiscal sustainability. The rule based Fiscal Policy of State in Post-FRBM Period endeavored the rationalization of economically unproductive revenue expenditure and simultaneously boosting the quantum of capital outlay in both Economic and Social Services Sector. The improvement in state finances is accompanied by higher growth in state economy. However, Odisha still lags behind the national average in case of many socio-economic indicators and needs to grow faster to catch up other relatively developed states. Higher investment in priority sector can be made through debt financing. The classical and contemporary literature on the impact of fiscal deficit and public debt on economic growth shows mixed results. Keynesian economists are strong about the positive impact, Neo classical economists advocate a negative impact and Ricardian economists believe neutral effect of fiscal deficit and debt on economic growth.
Hence, certain general queries that ramble in many of the researchers’ mind include: Does Odisha's fiscal deficit cause economic growth and whether the relationship is unidirectional or bidirectional? Does the fiscaldeficitof Odisha negatively affect the economic growth? From thereviewof literatures, no significant study was found that answer these two important issues. This present study intends to fill the gap by analysing these two significant research questions. Therefore, the study is designed to examine causal nexusbetween Fiscal Deficit and EconomicGrowth and its effect on economic growth in Odisha; to estimate the threshold level of fiscal deficit; and to evaluate the link between Public Debt and Economic Growth of Odisha. The study is carried out by taking annual data of the State of Odisha for the period from 1950–51 to 2014–15.
The analysis is made using various econometric models. The stationarity of the data series both for fiscal deficit and growth as well as debt and growth is analyzed using Augmented Dicky-Fuller unit root test (ADF) and Phillips-Perron unit root test for checking the suitability of the data to apply the co-integration technique. Once stationarity condition is satisfied, Johansen and Juselius (JJ) cointegration techniques are used to find out whether there exists any co-integrating vector to establish long-run relationship between the variables. Once the study finds existence of long run relationship between variables, the causality is investigated using Granger causality test. Then the VECM is used to estimate the speed of adjustment of the variables in long-run. TSLS regression technique has been used to analyze the effect of fiscal deficit and public debt on economic growth. Threshold model formulated by Khan and Senhadji is used to determine the threshold level for fiscal deficit having positive impact on growth.
The findings of the study reveals the influence of fiscal deficit on state GSDP both in short run and long run in case of Odisha but the reverse is not established. Thus, this empirical result goes in favor of Keynesian school of thought. The magnitude of impact of fiscal deficit on growth of GSDP is significantly positive and it has an elastic impact. The threshold fiscal deficit is estimated at 3.5% of GSDP. A long run stable relationship is established between debt stock and economic growth of the state.
In the short run, both debt stock and economic growth influence each other. Whereas, in the long run debt stock impacts the economic growth but not vice versa. In short run, incremental debt stock generates income in the state, and because of rise in income creates capacity to absorb more debt. But in the longrun, debt stockgenerates income for the state provided the fiscal deficit ineach yeardoes not breach threshold limit of 3.5% of GSDP. The results of the study reveal the existence of fiscal sustainability situation in the state. The finding of the threshold limit of fiscal deficit to GSDP ratio at 3.5% is in line with the 14th Finance commission recommendations. The study establishes positive impactof fiscal deficitup to 3.5%of GSDPof Odisha. Hence, the fiscalspaceshould be utilized by the State for expansion of the state economy.
