Consistent measurement of fiscal deficit and debt of states in India

Abstract

There are differences in the definition of debt used by different bodies like the state governments, Reserve Bank of India, Office of the Comptroller and Auditor General of India and the Finance Commission. Moreover, none of these definitions satisfy the criterion that fiscal deficit in a given year should equal the sum of increase in debt and monetisation. This paper builds on this basic criterion to derive a theoretically consistent and appropriate definition of debt. The definition is then used to estimate debt for 18 non-special category states and 10 special category states for the period 1989-90 to 2003-04 and obtain effective interest rates for these states. We observe that non-special category states have a significantly greater probability of fiscal sustainability than the special category states. Moreover, when the trend in the proportion of debt of each state in the aggregate of all states is compared with trends in similar proportions of fiscal transfers from the centre and that in the primary deficit on own account, we find that certain states have benefited by largesse from the centre despite a consistently bad performance, while certain performing states have been penalised by reduced fiscal transfers.