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Ricardian approach to fiscal sustainability in India

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  • Pradhan, Krishanu

    (Institute for Social and Economic Change)

Abstract

There are several approaches to assess sustainability of a country’s public finance. Ricardian Equivalence (RE) is one such approach, in which fiscal sustainability (FS) is defined in terms of neutrality of generational welfare by government fiscal policy. The present work is an attempt to discuss and analyze the FS of India in the context of RE. Different forms of empirically testable equations for testing RE are derived based on studies by Buiter and Tobin (1978), Kormendi (1983) and Kormendi and Meguire (1990). Based on availability of data, the empirical evidences are against the RE hypothesis, and hence the fiscal policy pursued during the study period (1974-2011) had been detrimental to generational welfare neutrality. One of the key aspects of FS is to ensure generational equity as reflected in the Fiscal Responsibility and Budget Management (FRBM) Act, 2003 in India. However, the empirical findings convey that fiscal policy had been unsustainable in the terms of generational equity in India.

Suggested Citation

  • Pradhan, Krishanu, 2015. "Ricardian approach to fiscal sustainability in India," Working Papers 335, Institute for Social and Economic Change, Bangalore.
  • Handle: RePEc:sch:wpaper:335
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    File URL: http://www.isec.ac.in/WP%20335%20-%20Krishanu%20Pradhan_Final.pdf
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    References listed on IDEAS

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    1. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
    2. E. J. Mishan, 1963. "How to Make a Burden of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 71, pages 529-529.
    3. Willem H. Buiter & James Tobin, 1978. "Debt Neutrality: A Brief Review of Doctrine and Evidence," Cowles Foundation Discussion Papers 497, Cowles Foundation for Research in Economics, Yale University.
    4. Seater, John J, 1993. "Ricardian Equivalence," Journal of Economic Literature, American Economic Association, vol. 31(1), pages 142-190, March.
    5. Kochin, Levis A, 1974. "Are Future Taxes Anticipated by Consumers? Comment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 6(3), pages 385-394, August.
    6. Barth, James R & Iden, George & Russek, Frank S, 1986. "Government Debt, Government Spending, and Private Sector Behavior: Comment," American Economic Review, American Economic Association, vol. 76(5), pages 1158-1167, December.
    7. Seater, John J. & Mariano, Roberto S., 1985. "New tests of the life cycle and tax discounting hypotheses," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 195-215, March.
    8. J. E. Meade, 1958. "Is The National Debt A Burden?," Oxford Economic Papers, Oxford University Press, vol. 10(2), pages 163-183.
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    Cited by:

    1. Isabelle Joumard & Peter Hoeller & Jean-Marc Fournier & Hermes Morgavi, 2017. "Public debt in India: Moving towards a prudent level?," OECD Economics Department Working Papers 1400, OECD Publishing.

    More about this item

    Keywords

    Fiscal policy; Government expenditures; Budget deficits;

    JEL classification:

    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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