Federalism, Fiscal Space, and Public Investment Spending: Do Fiscal Rules Impose Hard Budget Constraints?

23 Pages Posted: 8 Mar 2017

See all articles by Pinaki Chakraborty

Pinaki Chakraborty

National Institute of Public Finance and Policy; Bard College - The Levy Economics Institute

Multiple version iconThere are 2 versions of this paper

Date Written: January 13, 2017

Abstract

The core emphasis of rules-based fiscal legislation at the subnational level in India is to achieve debt sustainability through a numerical ceiling on borrowing and the use of borrowed resources for public capital investment by phasing out revenue deficits. Using the Arellano Bond Panel estimation, this paper examines whether the application of fiscal rules has resulted in an increase in the fiscal space for public capital investment spending in major Indian states. This analysis shows that by controlling other factors, there is a negative relationship between fiscal rules and public capital investment spending at the state level during the rules-based fiscal regime.

Keywords: federalism, fiscal space, fiscal rules, public investment, public spending, fiscal rules, budget constraints, Arellano Bond Panel estimation, spending inertia

JEL Classification: H00, H6

Suggested Citation

Chakraborty, Pinaki, Federalism, Fiscal Space, and Public Investment Spending: Do Fiscal Rules Impose Hard Budget Constraints? (January 13, 2017). ADBI Working Paper 637. Available at SSRN: https://ssrn.com/abstract=2928714 or http://dx.doi.org/10.2139/ssrn.2928714

Pinaki Chakraborty (Contact Author)

National Institute of Public Finance and Policy ( email )

18/2, Satsang Vihar Marg
New Delhi, 110067
India

Bard College - The Levy Economics Institute ( email )

Blithewood
Annandale-on-Hudson, NY 12504-5000

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