Consequences of fiscal optimism for fiscal planning and fiscal discipline: Some insights from India

This paper attempts to empirically analyse the impact of India’s medium term perspective on its fiscal management, and their subsequent implications for subnational Governments’ fiscal situation. Using graphical analysis, exploratory statistics and regression techniques, this paper endeavours to investigate the impact of revenue forecast error on Centre’s primary balance, and in turn its impact on States’ fiscal imbalance. The illustrative empirical exercises of this paper reveal that optimistic medium term macro-fiscal forecasting has been a predominant feature of India’s fiscal policy ever since it adopted fiscal discipline. The forecast errors are found to have serious consequences for India’s primary balance and debt accumulation pronouncing even stronger over longer horizons. The forecast-error-induced primary balance at the Centre leads to a significant deterioration in the quality of fiscal deficit of State Governments. Financial irregularity emerges as an important determinant of forecast error. This paper, though illustrative in nature, provides useful insights for better fiscal planning and management in the era of fiscal consolidation in India.