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Fiscal Rules in India: Are They Effective?

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  • Buiter, Willem H.
  • Patel, Urjit R.

Abstract

This paper, a chapter in the forthcoming Oxford University Press Handbook of the Indian Economy, edited by Chetan Ghate, considers India’s experience with fiscal (responsibility) rules during the past decade. After reviewing the basic facts concerning public debt and deficits in India, the background and basic arithmetic of the Fiscal Responsibility and Budget Management Act, 2003 (FRBMA) are presented and commented upon. With the very small number of data points at our disposal, no formal statistical estimation and hypothesis testing about the efficacy of the rules can even be attempted. Instead we critically explore the outcomes of the FRBMA over the 5-year period of its operation, 2004/05-2008/09, using an eclectic but comprehensive metric comprising quantitative targets, qualitative strictures, transparency, integrity, and overall financial performance over the business cycle. We also briefly review fiscal responsibility legislation (and outcomes) at the state level. The evidence suggests that in recent years the fiscal space “vacated” by the states has been usurped by the central government. Finally, the recommendations of the 13th Finance Commission regarding a roadmap for fiscal consolidation are examined. We also outline a basic incentive compatible framework for state and central governments to hold each other accountable over agreed pre-determined targets.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7810.

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Date of creation: May 2010
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Handle: RePEc:cpr:ceprdp:7810

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Related research

Keywords: 2003; crowding out; Fiscal Responsibility and Budget Management Act; fiscal sustainability; monetisation of public debt; sovereign default;

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References

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  1. Barro, Robert J., 1979. "On the Determination of the Public Debt," Scholarly Articles 3451400, Harvard University Department of Economics.
  2. Carmen M. Reinhart & Kenneth S. Rogoff, 2010. "Growth in a Time of Debt," American Economic Review, American Economic Association, vol. 100(2), pages 573-78, May.
  3. Alan J. Auerbach, 2008. "Federal Budget Rules: The US Experience," NBER Working Papers 14288, National Bureau of Economic Research, Inc.
  4. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, edition 1, volume 1, number 8973.
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Cited by:
  1. Eduardo López E. & Víctor Riquelme P. & Ercio Muñoz S., 2011. "Long – Term Interest Rate and Fiscal Policy," Working Papers Central Bank of Chile 633, Central Bank of Chile.

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