Abstract
This chapter examines the interrelationship between fiscal reforms, fiscal rules and development spending. The objective is to understand the impact of state-level Fiscal Responsibility Act (FRA) on development spending. FRA introduced a fixed numerical ceilings on borrowing for subnational governments in India, which in a way put an upper limit on the fiscal space for spending given the resource envelope. The chapter observes that post FRA, states have witnessed significant improvement in fiscal balance. The econometric estimates reveal that improvement in fiscal balance at the subnational level is largely revenue driven, and revenue cyclicality has altered the fiscal space for development spending with an increase in spending disparity across states.
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Notes
- 1.
The decline in interest burden is due to the softening of interest rates on government securities in the last couple of years. Also, measures like debt swap schemes in a low-interest regime have benefited the states in reducing the interest burden (Chakraborty 2005).
- 2.
As mentioned by Rao M G (2007, p. 1253), this kind of transfers have been ‘undermining the role of systems and institutions in the transfer system. In fact, even under the transfers for state plans, normal assistance, which is given according to the Gadgil formula, constituted less than 48 per cent. Thus, we have a situation where the grants system has become predominantly purpose specific with a cobweb of conditionalities specified by various central ministries. Furthermore, quite a considerable proportion of grants which used to be given to the states now directly goes to autonomous agencies. This raises questions about the capacity to deliver public services by these autonomous agencies, mechanisms to augment the capacity and as the funds do not pass through states’ consolidated funds, of accountability.’
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Acknowledgements
The author is grateful to Satadru Das and Kaushik Bhadra for the helpful research assistance for this chapter.
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Chakraborty, P. (2014). Fiscal Reforms, Fiscal Rule and Development Spending: Two Decades of Indian Experience. In: Khasnabis, R., Chakraborty, I. (eds) Market, Regulations and Finance. India Studies in Business and Economics. Springer, New Delhi. https://doi.org/10.1007/978-81-322-1795-4_6
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DOI: https://doi.org/10.1007/978-81-322-1795-4_6
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