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.
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