Consistent Measurement of Fiscal Deficit and Debt of States in India

There are differences in the definition of debt used by different bodies like the state governments, Reserve Bank of India, the Office of Comptroller and Auditor General of India and the Eleventh Finance Commission. Moreover, none of these definitions satisfy the criterion that fiscal deficit in a given year should equal the sum of increase in debt and monetisation. This paper attempts to estimate debt in a theoretically consistent and appropriate manner for 15 non special category states and 10 special category states for the period 1989-90 to 2003-04, which are then used to obtain effective interest rates for these states. We observe that non-special category states have a significantly greater probability of fiscal sustainability than the special category states. Moreover, when the trends in the proportion of debt of each state in the aggregate of all states is compared with trends in similar proportions of fiscal transfers from the centre and that in primary deficit on own account, we find that certain states have benefited by largesse from the centre despite a consistent bad performance while certain performing states have been penalized by reduced fiscal transfers.

Is India’s Federal Debt Sustainable? - Revisiting an Old Debate

That India faces a ‘fiscal crisis’ has been a recurrent refrain of the literature on India’s economic reforms. Indeed a central objective of the reforms process, one that has proved elusive so far, is the reduction in the fiscal deficit of the central government. The supposed intractability of the fiscal problem has provided the motivation for the passage of the Fiscal Responsibility and Budget Management Act in 2003 that commits the government to targets for the fiscal and revenue deficits. We revisit the proposition that India’s debt problem is unsustainable in light of the recently changed outlook for growth and interest rates. Using a decomposition model, we separate out the effects on the fiscal deficit of growth and government behaviour in the past. We find that if recent government behaviour were to continue, the Indian economy would to achieve a growth rate of 6.5 per cent in the coming years, something that seems eminently achievable. Next, positing a nominal growth rate of 11 per cent (or a real growth rate of 6.1 per cent) in the coming years and making suitable assumptions about revenue buoyancy and other receipts, we empirically estimate the growth in primary expenditure that would be permissible. We find that no deceleration in primary expenditure is required if we assume a revenue buoyancy of 1 or above. We compare our optimistic projections with the sombre estimates of the Kelkar Task Force and find that our estimates differ from KTF’s because the KTF report postulates much higher levels of debt than we do. Clearly, we need a consensus on what India’s debt position today is. Nevertheless, our analysis does suggest that assessments of the sustainability of India’s debt have not adequately factored in the changed outlook for growth and interest rates.