Subnational level fiscal health in India: stability and sustainability implications

摘要

Fiscal health of subnational governments is a priority area of concern in the contemporary policy debate in India. The central government has recently announced that Kerala, Punjab and West Bengal are fiscally unsound at the level of general category states. The study reviews this projection by recent and long-term trends of basic fiscal variables, and then assesses their financial stability and sustainability along the debt-deficit spiral over time. We found that a sharp rise in the revenue account gap caused fiscal deficit to grow steadily and hence a high-flying outstanding debt in all states during late 1990s to early 2000s. This enormous stock of debt emerged as a higher deviation 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. Furthermore, none of the states accomplished fiscal sustainability fully. Excepting West Bengal, they attained partial sustainability as their debt-deficit system slowly restores the 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 a special attention to achieve the equilibrium in long run.