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Sustainability and Growth Implications of Sub-National Fiscal Choices in India: A Case of Kerala

In: India's Public Finance and Policy Challenges in the 2020s

Author

Listed:
  • P. S. Renjith

    (Gulati Institute of Finance and Taxation (GIFT) (Affiliated to Cochin University of Science and Technology))

  • Steffy Antony

    (Gulati Institute of Finance and Taxation (GIFT) (Affiliated to Cochin University of Science and Technology))

Abstract

Indian states have grappled with fiscal challenges like limited revenue autonomy and expanding expenditure responsibilities, impacting their development trajectory and public interventions. To address these challenges, states have reduced productive investments, adjusted priorities, and sought more borrowing space. Despite constraints, some state policies have supported public interventions for potential long-term sustainability and economic growth. In this context, the present study focuses on Kerala, one of the most fiscally stressed Indian states, to evaluate the impact of state fiscal choices on development, sustainability, and using growth using data from 1980 to 2022. Employing policy response models, a growth equation with p-spline estimation, and threshold regression, the study reveals that: (i) fiscal choices influence development spending, (ii) affect sustainability, and (iii) impact growth outcomes. It was found that an increase in the fiscal deficit beyond 3% leads to higher development expenditure. The sustainable debt-GSDP threshold for Kerala is identified as 27.9%, which is approximately 10% lower than the current level of 36.69%. Kerala's debt-GSDP ratio is growth-inducing up to this threshold but becomes growth-hindering beyond it. Simulation projections suggest achieving a 27.9% debt-to-GSDP ratio by 2032 with a nominal growth rate of 12% and a fiscal deficit of 3%. The study advocates for state-specific fiscal policies instead of a one-size-fits-all approach to strengthen Indian fiscal federalism.

Suggested Citation

  • P. S. Renjith & Steffy Antony, 2025. "Sustainability and Growth Implications of Sub-National Fiscal Choices in India: A Case of Kerala," India Studies in Business and Economics, in: K. R. Shanmugam (ed.), India's Public Finance and Policy Challenges in the 2020s, pages 65-82, Springer.
    • Handle: RePEc:spr:isbchp:978-981-96-2860-5_5
    DOI: 10.1007/978-981-96-2860-5_5
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