JSARJournal of South Asian Research
Peer Reviewed Journal
Peer Reviewed Journal
STATE DIFFERENTIATED FISCAL DEFICIT SUSTAINABILITY NORMS: ENSURING MACRO CONSISTENCY
States have often argued for differentiated fiscal deficit to GSDP norms for the pursuit of fiscal consolidation. In this paper, we have argued that this is feasible and consistent with Twelfth Finance Commission recommendations provided a consistency is maintained with macro considerations arising from sectoral saving-investment balances. We have illustrated the conditions that ensure flexibility for the states and consistency with macro considerations. In particular, states can judiciously exercise the option given to them for choosing between fiscal deficit to GSDP norm and the interest payments to revenue receipts norm. This choice critically depends on the revenue receipts to GSDP ratios apart from interest rates and growth rates of states relative to the corresponding averages of all states. One key implication of these findings is that fiscal transfer decisions have a bearing on fiscal consolidation choices since revenue receipts to GSDP ratio depends on the scheme of fiscal transfer to states. Thus, fiscal transfer decisions and fiscal consolidation targets should be determined jointly.
Keywords: Fiscal Sustainability; Fiscal Federalism; State Fiscal Deficits; Fiscal Rules; Subnational Debt Sustainability; Fiscal Responsibility Legislation; Intergovernmental Fiscal Transfers; Macro-Fiscal Consistency; Saving-Investment Balance; Fiscal Consolidation; Fiscal Institutions; Public Debt Management
D.K. Srivastava, Ragini Trehan, Tarrung Kapur, Muralikrishna Bharadwaj (2026). State differentiated fiscal deficit sustainability norms: Ensuring macro consistency. Journal of South Asian Research, 4: 2, pp. 225-257.
