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Subnational fiscal sustainability analysis : what can we learn from Tamil Nadu ?

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  • Ianchovichina, Elena
  • Liu, Lili
  • Nagarajan, Mohan

Abstract

In the late 1990s the Indian state of Tamil Nadu experienced an unprecedented fiscal deterioration, which was part of the widespread fiscal deterioration in Indian states. This deterioration was troubling because current expenditure outgrew total revenue, leaving little fiscal space for infrastructure spending. The paper presents a framework for subnational fiscal sustainability analysis and applies it to Tamil Nadu where subsequent fiscal adjustment has been ambitious and politically challenging, but has promised to put state finance on a sustainable path and create fiscal space for infrastructure investment. The paper emphasizes the differences between fiscal sustainability analysis at the national and subnational levels, attempts to take into account uncertainty, and discusses the key components of the state's fiscal accounts and how they respond to reforms and shocks. Risks to Tamil Nadu's fiscal outlook include interest rate shocks, pressures on the primary balance, and contingent liabilities. Though the state's efforts to remove constraints to economic growth, minimize recurrent expenditures and maximize its revenue potential will be critical for fiscal sustainability, national policies feature prominently in subnational fiscal adjustment. Tamil Nadu's quest for fiscal sustainability is relevant for other countries. Decentralization has given subnational governments in developing countries significant spending and taxation responsibilities, and the capacity to incur debt. The fiscal stress of the Indian states echoed the fiscal crises of subnational governments in several other major emerging economies.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 3947.

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Date of creation: 01 Jun 2006
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Handle: RePEc:wbk:wbrwps:3947

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Keywords: Banks&Banking Reform; Fiscal Adjustment; Public Sector Economics&Finance; Economic Theory&Research; Economic Stabilization;

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References

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  1. Oya Celasun & Xavier Debrun & Jonathan D. Ostry, 2006. "Primary Surplus Behavior and Risks to Fiscal Sustainability in Emerging Market Countries: A "Fan-Chart" Approach," IMF Staff Papers, Palgrave Macmillan, vol. 53(3), pages 3.
  2. Canning, David & Bennathan, Esra, 2000. "The social rate of return on infrastructure investments," Policy Research Working Paper Series 2390, The World Bank.
  3. David Alan Aschauer, 1998. "Public Capital and Economic Growth: Issues of Quantity, Finance, and Efficiency," Economics Working Paper Archive wp_233, Levy Economics Institute.
  4. Briceno-Garmendia, Cecilia & Estache, Antonio & Shafik, Nemat, 2004. "Infrastructure services in developing countries : access, quality, costs and policy reform," Policy Research Working Paper Series 3468, The World Bank.
  5. Enrique G. Mendoza & P. Marcelo Oviedo, 2006. "Fiscal Policy and Macroeconomic Uncertainty in Developing Countries: The Tale of the Tormented Insurer," NBER Working Papers 12586, National Bureau of Economic Research, Inc.
  6. Theodore M. Barnhill & George Kopits, 2003. "Assessing Fiscal Sustainability Under Uncertainity," IMF Working Papers 03/79, International Monetary Fund.
  7. Oya Celasun & Xavier Debrun & Jonathan David Ostry, 2006. "Primary Surplus Behavior and Risks to Fiscal Sustainability in Emerging Market Countries," IMF Working Papers 06/67, International Monetary Fund.
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Citations

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Cited by:
  1. Canuto, Otaviano & Liu, Lili, 2010. "Subnational Debt Finance and the Global Financial Crisis," World Bank - Economic Premise, The World Bank, issue 13, pages 1-7, May.
  2. Liu, Lili & Pradelli, Juan, 2012. "Financing infrastructure and monitoring fiscal risks at the subnational level," Policy Research Working Paper Series 6069, The World Bank.
  3. Dethier, Jean-Jacques, 2013. "Coping with urban fiscal stress around the world," Policy Research Working Paper Series 6693, The World Bank.
  4. Independent Evaluation Group, 2008. "Decentralization in Client Countries : An Evaluation of World Bank Support, 1990-2007," World Bank Publications, The World Bank, number 6543, October.
  5. Liu, Lili & Tan, Kim Song, 2009. "Subnational credit ratings : a comparative review," Policy Research Working Paper Series 5013, The World Bank.
  6. Otaviano Canuto & Lili Liu, 2010. "Subnational Debt Finance and the Global Financial Crisis," World Bank Other Operational Studies 10186, The World Bank.
  7. Rangarajan , C. & Prasad, Abha, 2012. "Managing state debt and ensuring solvency : the Indian experience," Policy Research Working Paper Series 6039, The World Bank.
  8. E. Jenkner & Zhongjin Lu, 2014. "Sub-National Credit Risk and Sovereign Bailouts: Who Pays the Premium?," IMF Working Papers 14/20, International Monetary Fund.
  9. Canuto, Otaviano & Liu, Lili, 2013. "Subnational Debt, Insolvency, and Market Development," World Bank - Economic Premise, The World Bank, issue 112, pages 1-7, April.
  10. Maurya, Nagendra Kumar, 2014. "Debt sustainability of state finances of Uttar Pradesh government," MPRA Paper 55692, University Library of Munich, Germany.
  11. Liu, Lili & Waibel, Michael, 2010. "Managing subnational credit and default risks," Policy Research Working Paper Series 5362, The World Bank.

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