Does Fiscal Deficit Matter for Economic Growth Performance of Indian States?

Abstract


 Considering a standard economic growth model, this study tries to empirically evaluate the effects of fiscal deficits on the economic growth of 14 major Indian states from 1980-81 to 2019-20. The panel fixed effect regression establishes that gross fiscal deficit (GFD), tax revenue, and inflation rates have a significant adverse impact on economic growth. In contrast, private investment, gross enrolment ratio (GER) in primary education, and the adoption of Fiscal Responsibility Legislations (FRLs) have favourable effects; non-tax revenues, GER in secondary education, and economic policy reform (EPR) didn't show any significant effect. Where FRLs were enacted, fiscal deficits showed a positive impact on growth in the post-FRL period. Further, we find a threshold effect of fiscal deficit on growth, implying that when GFD lies within a specified threshold, it has a positive impact; beyond this limit, it impedes states’ economic growth.