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Subnational fiscal sustainability analysis : what can we learn from Tamil Nadu ?

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  • Ianchovichina, Elena
  • Liu, Lili
  • Nagarajan, Mohan

Abstract

In the late 1990s the Indian state of Tamil Nadu experienced an unprecedented fiscal deterioration, which was part of the widespread fiscal deterioration in Indian states. This deterioration was troubling because current expenditure outgrew total revenue, leaving little fiscal space for infrastructure spending. The paper presents a framework for subnational fiscal sustainability analysis and applies it to Tamil Nadu where subsequent fiscal adjustment has been ambitious and politically challenging, but has promised to put state finance on a sustainable path and create fiscal space for infrastructure investment. The paper emphasizes the differences between fiscal sustainability analysis at the national and subnational levels, attempts to take into account uncertainty, and discusses the key components of the state's fiscal accounts and how they respond to reforms and shocks. Risks to Tamil Nadu's fiscal outlook include interest rate shocks, pressures on the primary balance, and contingent liabilities. Though the state's efforts to remove constraints to economic growth, minimize recurrent expenditures and maximize its revenue potential will be critical for fiscal sustainability, national policies feature prominently in subnational fiscal adjustment. Tamil Nadu's quest for fiscal sustainability is relevant for other countries. Decentralization has given subnational governments in developing countries significant spending and taxation responsibilities, and the capacity to incur debt. The fiscal stress of the Indian states echoed the fiscal crises of subnational governments in several other major emerging economies.

Suggested Citation

  • Ianchovichina, Elena & Liu, Lili & Nagarajan, Mohan, 2006. "Subnational fiscal sustainability analysis : what can we learn from Tamil Nadu ?," Policy Research Working Paper Series 3947, The World Bank.
  • Handle: RePEc:wbk:wbrwps:3947
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    References listed on IDEAS

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    2. Oya Celasun & Xavier Debrun & Jonathan D. Ostry, 2006. "Primary Surplus Behavior and Risks to Fiscal Sustainability in Emerging Market Countries: A "Fan-Chart" Approach," IMF Staff Papers, Palgrave Macmillan, vol. 53(3), pages 1-3.
    3. Enrique G. Mendoza & P. Marcelo Oviedo, 2006. "Fiscal Policy and Macroeconomic Uncertainty in Developing Countries: The Tale of the Tormented Insurer," NBER Working Papers 12586, National Bureau of Economic Research, Inc.
    4. Briceno-Garmendia, Cecilia & Estache, Antonio & Shafik, Nemat, 2004. "Infrastructure services in developing countries : access, quality, costs and policy reform," Policy Research Working Paper Series 3468, The World Bank.
    5. Theodore M. Barnhill & George Kopits, 2003. "Assessing Fiscal Sustainability Under Uncertainity," IMF Working Papers 03/79, International Monetary Fund.
    6. Canning, David & Bennathan, Esra, 2000. "The social rate of return on infrastructure investments," Policy Research Working Paper Series 2390, The World Bank.
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    Citations

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    Cited by:

    1. Liu, Lili & Waibel, Michael, 2010. "Managing subnational credit and default risks," Policy Research Working Paper Series 5362, The World Bank.
    2. Canuto, Otaviano & Liu, Lili, 2013. "Subnational Debt, Insolvency, and Market Development," World Bank - Economic Premise, The World Bank, issue 112, pages 1-7, April.
    3. Lili Liu, 2010. "Strengthening Subnational Debt Financing and Managing Risks," World Bank Other Operational Studies 19471, The World Bank.
    4. Lili Liu, 2009. "Turkey," World Bank Other Operational Studies 26063, The World Bank.
    5. Eva Jenkner & Zhongjin Lu, 2014. "Sub-National Credit Risk and Sovereign Bailouts; Who Pays the Premium?," IMF Working Papers 14/20, International Monetary Fund.
    6. Liu, Lili & Tan, Kim Song, 2009. "Subnational credit ratings : a comparative review," Policy Research Working Paper Series 5013, The World Bank.
    7. Narayan, Laxmi, 2015. "Some Aspects of Haryana State Finances –An Exploratory Analysis," MPRA Paper 64697, University Library of Munich, Germany, revised Apr 2015.
    8. Independent Evaluation Group, 2008. "Decentralization in Client Countries : An Evaluation of World Bank Support, 1990-2007," World Bank Publications, The World Bank, number 6543, June.
    9. Canuto, Otaviano & Liu, Lili, 2010. "Subnational Debt Finance and the Global Financial Crisis," World Bank - Economic Premise, The World Bank, issue 13, pages 1-7, May.
    10. Liu, Lili & Pradelli, Juan, 2012. "Financing infrastructure and monitoring fiscal risks at the subnational level," Policy Research Working Paper Series 6069, The World Bank.
    11. Narayan, Laxmi, 2017. "Growth of Public Debt in Haryana – Dynamism or Misplaced Priorities," MPRA Paper 79431, University Library of Munich, Germany, revised 05 May 2017.
    12. Dethier, Jean-Jacques, 2013. "Coping with urban fiscal stress around the world," Policy Research Working Paper Series 6693, The World Bank.
    13. Maurya, Nagendra Kumar, 2014. "Debt sustainability of state finances of Uttar Pradesh government," MPRA Paper 55692, University Library of Munich, Germany.
    14. Rangarajan , C. & Prasad, Abha, 2012. "Managing state debt and ensuring solvency : the Indian experience," Policy Research Working Paper Series 6039, The World Bank.
    15. Narayan, Laxmi, 2016. "Analysis of Public Debt and Fiscal Sustainability for Haryana," MPRA Paper 70100, University Library of Munich, Germany.

    More about this item

    Keywords

    Banks&Banking Reform; Fiscal Adjustment; Public Sector Economics&Finance; Economic Theory&Research; Economic Stabilization;

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