Fiscal Deficit In India Research Articles

Revisiting fiscal deficit sustainability and revenue-expenditure nexus in India

The COVID-19 epidemic has brought to the emergence of fiscal sustainability as an exceptionally challenging issue for both emerging and advanced economies. In this context, it is imperative to assess the sustainability of fiscal deficit in India for the Central and State level for the period 1970–71 to 2021–2022 and 1973–74 to 2021–22, respectively. Furthermore, the study also seeks to establish the cause-and-effect relationship between government expenditure and revenue. The application of Gregory-Hansen cointegration test supports sustainability of fiscal deficits for Central and State governments individually. Additionally, the ARDL model for cointegration indicates that both governments exhibit "weak" sustainability of the fiscal deficit. Finally, the Toda-Yamamoto Granger non-causality test provides evidence in favour of the "spend-tax hypothesis" for both governments. In this backdrop, the present study posits that it is essential for governments to implement fiscal consolidation and prudent fiscal policies in order to reduce the magnitude of the budget deficit, optimise the execution of monetary and exchange rate policies, and foster development driven by the private sector. This approach is crucial to ensure long-term fiscal sustainability and economic stability in India, especially aftermath of the COVID-19 pandemic.

Policy Implications of Fiscal Deficit and Its Trends in India: An Econometric Analysis

"The paper attempted to explore the trend of fiscal deficit in India from 1993-94 to 2022-23 and also to determine whether the growth patterns of fiscal deficit have changed before and after the Housing Bubble Crisis of 2008. The study too made an effort to analyse the causality among fiscal deficit, government revenue and expenditure in India. Therefore, the paper follows a diagnostic research design, and is based on secondary data, collected from the Budget and finance documents of the Government of India. Econometrics tools including eight different regression models and CAGR (Compound Annual Growth Rate) were used. And the study revealed that the fiscal deficit follows a log-linear trend, and as per the VDA (Variance Decomposition Analysis) model in the long run the variability of fiscal deficit is explained by 66.09% of govt. expenditure, for the sample period. Thus, the study recommends to efficiently utilise the govt. expenditure to have a proper management of the fiscal deficit in India."

Central Bank Independence and its Impact on Fiscal Deficit: Evidence from India

Abstract The paper explores the relationship between Central bank independence (CBI) and fiscal deficit in India. Moreover, the study tries to assess the impact of CBI on the levels of fiscal deficit. The study incorporates other variables like Gross Domestic Product, financial development, and trade openness to analyze their impact on the fiscal deficit. The study employed Auto-regressive distributed lag model (ARDL) Bounds test developed by Pesaran, Shin, and Smith (2001) to examine the long-run relationship between CBI and fiscal deficit. The study also employs a legal index for measuring CBI developed by Jasmine et al (2019) as well as an actual measure of independence developed by Cukierman (1992) to measure CBI in India. The study confirms the long-run relationship between the CBI and fiscal deficit as well as among other variables. An increase in the levels of CBI leads to falling in the levels of fiscal deficit. The other explanatory variables used in the study also confirm the long-run relationship and impact fiscal deficit negatively except for trade openness, which positively impacts the fiscal deficit.

Assessing the Long-Run Sustainability of Public Debt and Fiscal Deficit in India

This article assesses the long-run sustainability of public debt and fiscal deficit in India for the period 1980–1981 to 2019–2020. The study estimated a model-based fiscal reaction function (FRF) using the Autoregressive Distributed Lag (ARDL) model to assess debt sustainability. The results revealed that the primary surplus responds positively and significantly to the previous period debt in both the short- and long-run. This implies that the fiscal policy satisfies the intertemporal budget constraint (IBC) and follows the debt-stabilizing rule. Next, to assess the sustainability of the fiscal deficit, we examined the long-run association between total revenues and total expenditures using a structural break cointegration test. The results revealed that they are cointegrated, implying that IBC is met and the fiscal deficit is sustainable. The results of long-run estimation provide evidence in support of strong budgetary sustainability. Overall, the results indicate that the public debt and the fiscal deficit are sustainable in India. From a policy standpoint, our research suggests that the government should take the necessary measures to reduce the growing public debt to ensure its long-run sustainability.

Inflation and Fiscal Deficit in India: An ARDL Approach

Global financial crisis of 2008 which marked its 10th anniversary recently has intensified the problem of fiscal deficit and inflation which happen to be the two foremost macroeconomic challenges confronting the Indian economy. In the light of unsettled debate pertaining to the inflationary tendencies of fiscal deficit, the present study attempts to empirically examine the important macroeconomic determinants of inflation in India and investigates whether the proposition of a positive effect of fiscal deficits on inflation can be verified in the particular case of the Indian economy using quarterly data from Q1: 1996–1997 to Q1: 2016-2017. The ARDL Bounds approach to cointegration reveals the existence of long-run relationship between inflation; gross fiscal deficit; money supply; exchange rate; crude oil prices; and output gap. The long-run and short-run dynamics indicate that gross fiscal deficit and money supply generate negative impact on inflation in India. From the supply side, crude oil prices and exchange rate are found to be playing an important role in determining domestic prices. From the demand side, in the absence of a stronger output-inflation relationship, the support for flexible inflation targeting framework does get encumbered as the case for the existence of Phillips curve in India further weakens through our analysis. This result bears significance especially in the context of a switch to a rule based anti-inflationary strategy in India.

Fiscal Deficit of the Public Sector in India: Issues on Data Reliability, Accounting Flaws and Missing Variables

Fiscal deficit, one of the widely acclaimed and internationally accepted measures of fiscal imbalance, is faced with a lot of conceptual and accounting issues in India. The definition of deficit has been changing and therefore there is no consistency in the official series of deficits published by the government of India. Since 1991, budgets were being framed in the context of the New Economic Policies (NEP) consisting of the Stabilization Policies and the Structural Adjustment Policies (SAP). While, the fiscal austerity in the form of expenditure reduction and revenue enhancement as a corollary to NEP has hardly worked out in India. However, the Central government has undertaken several measures to show a reduced fiscal deficit in India. One of the ways practiced was to implement some changes in the accounting practices over the years. This was by including some additional elements in the definition of deficit and excluding some other items. The second practice was to transfer the deficit of the Centre to other layers of the government. In a broad fiscal policy regime framework following Prof. Arun Kumar’s modified National Income Identity (1988), a total government or public sector comprising of the Centre, State/UTs and local-self-governments as well as the Public Sector Enterprises (PSEs) at the Centre and State levels. The problem of deficit shifting can be automatically avoided by taking the whole public sector into the analysis, which makes the empirical results on interrelationship between fiscal deficit and various macroeconomic variables more realistic and convincing. Still, there is a paucity of white economy data, because of the existence of substantial black economy in India. Its non-inclusion in analysis results in a partial understanding of the economy and often incorrect policy pronouncements. The need to incorporate the black economy is not simply an empirical matter, but a theoretical necessity. This paper in general tries to bring the aforementioned issues on data reliability, accounting flaws and missing variables into the discussion and attempt to correct the fudges in the official deficit series published by the government and also tries construct a compiled series of deficit for the public sector in India. The empirical section of the paper explains the significance of black economy as a variable to be included in the analysis to get better understanding of the economy.

Fiscal Management in India: A Study of the Impact of FRBM Act

Fiscal deficit, the gap between government's aggregate receipts and aggregate consumption, gives the flag to the union about the aggregate acquiring necessary from all sources. Since these deficits had to be met by borrowings, the internal debt of the government accumulated rapidly from 35 percent of GDP at the end of 1980-81 to 53 percent of GDP at the end of 1990-91. Fiscal profligacy seen to have caused balance of payments crisis in 1991 and a reduction in the fiscal deficit was therefore an urgent priority at the start of the reforms. This paper aims at describing intricacies of fiscal deficit and to assess the impact of FRBMA on fiscal deficit in India from 1991-92 to 2016-17 by statistical techniques. The study observes a significant impact of FRBMA on fiscal deficit discipline in India and offers some valuable suggestions for effective fiscal governance and achieving targets pre-set in FRBMA.

An Empirical Analysis of Sustainability of Debt and Fiscal Deficit in India

The issue of sustainability of fiscal deficit has drawn considerable attention in recent times. Fiscal sustainability means application of set of fiscal policies that could be continued unaltered without jeopardising the macroeconomic objectives like economic growth, controlling inflation, balanced foreign exchange management, etc. Intertemporal budget constraint method is used to study how fiscal policy affects macroeconomic variables like price, output, foreign exchange reserve, primary deficit, sustainability of debt, etc. Most of the positive fiscal correction was found since the year 2003–04, when the Fiscal Responsibility and Budget Management act was passed by the government and the consequent efforts that it put to discipline the act, which were the principal reasons. The debt to Gross Domestic Product (GDP) ratio (bt) had been fluctuating during the previous years, but since 2000–01, it has been moving towards, which shows improving fiscal situation and transition towards a steady-state level of debt-GDP ratio. India has achieved sustainable levels of debt and deficits since year 2003–04; however, prior to this, the fiscal scenario was not favourable as it lacked sustainability.