Was There A Government Expenditures Rule in Disguise During 2014-19? Some Evidence for India

Abstract

An expenditure rule takes the form of a limit on real spending by the Government. It is a prerequisite to ensure stability of the economy. Such rules, generally, impose restriction on the budget deficits, if stipulated as a law even in disguise. The purpose is to ensure macro-economic stability by rendering negative externalities, if any, of pursuing an independent fiscal policy from that of a previous government. Such rules are in place, officially, in several advanced and emerging economies (Cordes et al, 2015). In this short study, the authors deploy an easily understandable model and set it against data for India, over the period 1992-93 to 2018-19 split up into three subperiods. These three sub periods roughly approximate the periods when a different political party was in government in New Delhi. The government at the beginning of the third period claims to have observed an expenditure rule in guise, with a view to keeping the ‘deficit’ at 3.5 percent or less. The empirical evidence, however, seems to be slightly in disagreement with the claim.