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Has Fiscal Rule changed the Fiscal Marksmanship of Union Government?

Author

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  • Chakraborty, Lekha

    (National Institute of Public Finance and Policy)

  • Sinha, Darshy

    (National Institute of Public Finance and Policy)

Abstract

We analyse the fiscal marksmanship of the macro-fiscal variables of Union Government ex-ante and ex-post to the formulation of fiscal rules in India. The fiscal marksmanship is the accuracy of budgetary forecasting. The fiscal rules have been legally mandated in India in the form of fiscal responsibility and budget management Act (FRBM Act) in 2003, with a criteria of fiscal-deficit to GDP threshold ratio of 3 per cent and gradual phasing out of revenue deficit. Using Theil's inequality coefficient (U) based on the mean square prediction error, the paper estimates the magnitude of errors in the budgetary forecasts in India during the period ex-ante and ex-post to fiscal rules, and also decomposed the errors into biasedness, unequal variation and random components. The decomposition of errors is to analyze the source of error in both the regimes. Our results found that in both regimes, the proportion of error due to random variation has been significantly higher, which is beyond the control of the forecaster. In other words, the error due to bias of the policy maker in preparing the Union Budget has been negligible in the period ex-ante and ex-post to fiscal responsibility and budget management (FRBM) Act in India. This result has significant policy implications especially in the context of repeal of 2003 FRBM Act in India and the Union Government has announced clauses for a `New FRBM Act' in India in the Finance Bill 2018.

Suggested Citation

  • Chakraborty, Lekha & Sinha, Darshy, 2018. "Has Fiscal Rule changed the Fiscal Marksmanship of Union Government?," Working Papers 18/234, National Institute of Public Finance and Policy.
    • Handle: RePEc:npf:wpaper:18/234
    Note: Working Paper 234, 2018
    as

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    References listed on IDEAS

    as
    1. Morrison, Rodney J, 1986. "Fiscal Marksmanship in the United States: 1950-83," The Manchester School of Economic & Social Studies, University of Manchester, vol. 54(3), pages 322-333, September.
    2. K. Nithin & Rathin Roy, 2016. "Finance commission of India's assessments: a political economy contention between expectations and outcomes," Applied Economics, Taylor & Francis Journals, vol. 48(2), pages 73-88, January.
    3. Davis, J M, 1980. "Fiscal Marksmanship in the United Kingdom, 1951-78," The Manchester School of Economic & Social Studies, University of Manchester, vol. 48(2), pages 187-202, June.
    4. Ghate, Chetan (ed.), 2012. "The Oxford Handbook of the Indian Economy," OUP Catalogue, Oxford University Press, number 9780199734580, Decembrie.
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    Cited by:

    1. Shrestha, Ruzel & Chakraborty, Lekha, 2019. "Practising Subnational Public Finance in an Emerging Economy: Fiscal Marksmanship in Kerala," Working Papers 19/261, National Institute of Public Finance and Policy.
    2. Chakraborty, Lekha S, 2019. "Indian Fiscal Federalism at the Crossroads: Some reflections," MPRA Paper 93516, University Library of Munich, Germany.
    3. Burman, Anirudh & Patnaik, Ila & Roy, Shubho & Shah, Ajay, 2018. "Diagnosing and overcoming sustained food price volatility: Enabling a National Market for Food," Working Papers 18/236, National Institute of Public Finance and Policy.
    4. Chakraborty, Lekha & Chakraborty, Pinaki & Shrestha, Ruzel, 2019. "Budget Credibility of Subnational Governments: Analyzing the Fiscal Forecasting Errors of 28 States in India," MPRA Paper 95921, University Library of Munich, Germany.
    5. Tandon, Suranjali, 2018. "Tax challenges arising from digitalisation," Working Papers 18/235, National Institute of Public Finance and Policy.

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    More about this item

    Keywords

    fiscal marksmanship ; budget forecast errors ; fiscal rules ; rational expectations;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

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