Threshold level of fiscal deficit: revisiting FRBMA limit in Indian states

Dinabandhu Sethi, V. V. Subba Rao () and Asit Ranjan Mohanty ()
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V. V. Subba Rao: CEFT, Xavier University
Asit Ranjan Mohanty: Xavier University

Journal of Social and Economic Development, 2020, vol. 22, issue 2, No 1, 233-249

Abstract: Abstract This paper examines whether the fiscal deficit limit of 3% as prescribed by the FRBMA is justified keeping in mind the increasing spending requirement and economic growth of Indian states? The study uses a panel data framework of taking sixteen non-special category states of India for the period over 2001–2002 to 2016–2017. This paper is the first of its kind that uses a threshold regression model due to Khan and Senhadji (IMF Staff Papers 48(1):1–21, 2001) to find the threshold level of fiscal deficit. The empirical findings show that the threshold level of fiscal deficit in sixteen states taken together is found to be 3%, which is in the line of prescribed limit of FRBM act. But at disaggregated level, it is observed that in middle- and low-income states the threshold level of fiscal deficit is 3.9% and 3.5%, respectively. This suggests that states can go for some additional percent of fiscal deficit above the limit prescribed by FRBMA. Therefore, the fiscal deficit limit of 3% needs to be revisited to give more fiscal room to the Indian states.

Keywords: Fiscal deficit; Threshold regression; FRBM rule; Economic growth (search for similar items in EconPapers)
JEL-codes: C23 H62 H72 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1007/s40847-020-00100-6

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