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, the Office of Comptroller and Auditor General of India and the Eleventh 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 attempts to estimate debt in a theoretically consistent and appropriate manner for 15 non special category states and 10 special category states for the period 1989-90 to 2003-04, which are then used to 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 trends 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 primary deficit on own account, we find that certain states have benefited by largesse from the centre despite a consistent bad performance while certain performing states have been penalized by reduced fiscal transfers.