Subnational-level Fiscal Health Stability and sustainability implications for Kerala, Punjab, and West Bengal

Nimai Das

No 329, IEG Working Papers from Institute of Economic Growth

Abstract: The Government of India has recently announced that Kerala, Punjab, and West Bengal are fiscally unsound at the level of general category states. The study reviews this projection and assesses their financial stability and sustainability along the debt-deficit spiral over time. It finds their recent fiscal performance perilous, especially on the revenue account. In particular, West Bengal differs moderately from Punjab and Kerala in recent performance and in the long run trend of basic fiscal variables that lead to different implications in stability and sustainability. The study finds that a sharp rise in the revenue account gap caused fiscal deficit to grow steadily and hence a high-flying debt stock in all states during the late 1990s to the early 2000s. This enormous stock of outstanding debt emerged as a higher value of actual primary deficit from its stability level. Given that the rate of interest exceeded growth of output during this period, it increased debt stock above the level of primary deficit. None of the states however accomplished fiscal sustainability fully. Excepting West Bengal, they attained partial sustainability as their debt-deficit system slowly restores long run equilibrium. West Bengal is far away from sustainability because its future surpluses are not enough to service the debt. The study suggests that a sound adjustment in fiscal position on revenue account is essential for all states and that West Bengal needs special attention to achieve equilibrium in the long run.

Keywords: Indian state; government budgetary deficit; public debt; long run fiscal policy (search for similar items in EconPapers)
JEL-codes: C22 E62 H72 H74 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2013
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Published as Institute of Economic Growth, Delhi, 2013, pages 1-32

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Working Paper: Subnational-level Fiscal Health: Stability and Sustainability Implications for Kerala, Punjab, and West Bengal (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:awe:wpaper:329

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