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Budget Credibility of Subnational Governments: Analyzing the Fiscal Forecasting Errors of 28 States in India

Author

Listed:
  • Chakraborty, Lekha
  • Chakraborty, Pinaki
  • Shrestha, Ruzel

Abstract

Budget credibility, the ability of governments to accurately forecast the macro-fiscal variables, is crucial for effective Public Finance Management (PFM). Fiscal marksmanship analysis captures the extent of errors in the budgetary forecasting. The fiscal rules can determine fiscal marksmanship, as effective fiscal consolidation procedure affects the fiscal behaviour of the states in conducting the budgetary forecasts. Against this backdrop, applying Theil’s technique, we analyse the fiscal forecasting errors for 28 States (except Telengana) in India for the period 2011-12 to 2015-16. There is a heterogeneity in the magnitude of errors across subnational governments in India. The forecast errors in revenue receipts have been greater than revenue expenditure. Within revenue receipts, the errors are pronounced more significantly in grants component. Within expenditure budgets, the errors in capital spending are found greater than revenue spending in all the States. Partitioning the sources of errors, we identified that the errors were more broadly random than systematic bias, except for a few crucial macro-fiscal variables where improving the forecasting techniques can provide better estimates.

Suggested Citation

  • 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.
  • Handle: RePEc:pra:mprapa:95921
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    File URL: https://mpra.ub.uni-muenchen.de/95921/1/MPRA_paper_95921.pdf
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    References listed on IDEAS

    as
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    2. Cassidy, Glenn & Kamlet, Mark S. & Nagin, Daniel S., 1989. "An empirical examination of bias in revenue forecasts by state governments," International Journal of Forecasting, Elsevier, vol. 5(3), pages 321-331.
    3. 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.
    4. 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.
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    More about this item

    Keywords

    forecast errors; fiscal policies; fiscal forecasting; political economy; fiscal marksmanship;

    JEL classification:

    • 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
    • H6 - Public Economics - - National Budget, Deficit, and Debt

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