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Multilateral adjustment lending to states in India: Hastening fiscal correction or softening the budget constraint?


  • M. Govinda Rao
  • Pinaki Chakraborty


The widening fiscal deficit of sub-national governments has made the task of macroeconomic stabilisation much more difficult and complex. In many countries, including India, multilateral lending institutions provide assistance for sub-national fiscal reforms through structural adjustment loans (henceforth SAL) with conditionalities heavily loaded with fiscal correction measures. This paper examines the fiscal impact of SAL in Indian states by analysing the quantitative and qualitative aspects of SAL-induced fiscal reforms. Econometric investigation of fiscal impact reveals that state specific effect of SAL in terms of fiscal consolidation has been mixed. There is evidence of softening of the budget constraints in some states, but there is also evidence of greater reduction in fiscal imbalances of SAL states than non-SAL states. It is also seen that much of the fiscal gains have occurred through improved revenue productivity of the tax system and not through expenditure restructuring. It is also seen that the poorer states have preferred to reduce their developmental expenditures to deal with fiscal stress and to comply with fiscal correction targets. This, in turn, has had adverse growth implications. The paper concludes that the benefits and the acceptability of SAL at the sub-national level in India would critically depend on factors such as the qualitative change in government expenditure in meeting deficient delivery of public services at state level, and the removal of state level social and infrastructural bottlenecks for promotion of growth by releasing government resources through expenditure restructuring and reform.

Suggested Citation

  • M. Govinda Rao & Pinaki Chakraborty, 2006. "Multilateral adjustment lending to states in India: Hastening fiscal correction or softening the budget constraint?," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 15(3), pages 335-357.
  • Handle: RePEc:taf:jitecd:v:15:y:2006:i:3:p:335-357 DOI: 10.1080/09638190600871677

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    References listed on IDEAS

    1. Marjit, Sugata, 2003. "Economic reform and informal wage--a general equilibrium analysis," Journal of Development Economics, Elsevier, vol. 72(1), pages 371-378, October.
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    3. Marcouiller, Douglas & Young, Leslie, 1995. "The Black Hole of Graft: The Predatory State and the Informal Economy," American Economic Review, American Economic Association, vol. 85(3), pages 630-646, June.
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    Cited by:

    1. Sharma, Chanchal Kumar, 2015. "Re-imagining Federalism in India: Exploring the Frontiers of Collaborative Federal Architecture," MPRA Paper 64325, University Library of Munich, Germany, revised 14 Feb 2015.
    2. Chakraborty, Pinaki, 2017. "Federalism, Fiscal Space, and Public Investment Spending: Do Fiscal Rules Impose Hard Budget Constraints?," ADBI Working Papers 637, Asian Development Bank Institute.
    3. repec:bla:pbudge:v:37:y:2017:i:4:p:111-133 is not listed on IDEAS
    4. Chakraborty, Pinaki & Dash, Bharatee Bhusana, 2013. "Fiscal Reforms, Fiscal Rule and Development Spending: How Indian States have Performed?," Working Papers 13/122, National Institute of Public Finance and Policy.
    5. Sally Wallace, 2011. "Status of PRI Finances in West Bengal Final Report," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper1115, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    6. Singh, Nirvikar, 2007. "Fiscal Federalism and Decentralization in India," MPRA Paper 1447, University Library of Munich, Germany.
    7. Pinaki Chakraborty, 2016. "Federalism, Fiscal Space, and Public Investment Spending: Do Fiscal Rules Impose Hard Budget Constraints?," Economics Working Paper Archive wp_872, Levy Economics Institute.
    8. Singh, Nirvikar, 2007. "Fiscal Federalism and Decentralization in India∗," Santa Cruz Department of Economics, Working Paper Series qt11b543tk, Department of Economics, UC Santa Cruz.
    9. Singh, Nirvikar, 2007. "The Dynamics of Reform of India’s Federal System," MPRA Paper 2282, University Library of Munich, Germany.
    10. Nirvikar Singh, 2007. "The dynamics of reform of India’s federal system," CESifo Forum, Ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 8(1), pages 22-31, April.
    11. M. Govinda Rao & Sen, Tapas K., 2011. "Federalism and fiscal reform in India," Working Papers 11/84, National Institute of Public Finance and Policy.


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