Subnational Fiscal Sustainability Analysis: What Can We Learn from Tamil Nadu?

34 Pages Posted: 20 Apr 2016

See all articles by Elena Ianchovichina

Elena Ianchovichina

World Bank

Lili Liu

World Bank - Poverty Reduction and Economic Management Network (PREM)

Mohan Nagarajan

World Bank

Date Written: June 1, 2006

Abstract

In the late 1990s the Indian state of Tamil Nadu experienced an unprecedented fiscal deterioration, which was part of the widespread fiscal deterioration in Indian states. This deterioration was troubling because current expenditure outgrew total revenue, leaving little fiscal space for infrastructure spending. The paper presents a framework for subnational fiscal sustainability analysis and applies it to Tamil Nadu where subsequent fiscal adjustment has been ambitious and politically challenging, but has promised to put state finance on a sustainable path and create fiscal space for infrastructure investment. The paper emphasizes the differences between fiscal sustainability analysis at the national and subnational levels, attempts to take into account uncertainty, and discusses the key components of the state's fiscal accounts and how they respond to reforms and shocks. Risks to Tamil Nadu's fiscal outlook include interest rate shocks, pressures on the primary balance, and contingent liabilities. Though the state's efforts to remove constraints to economic growth, minimize recurrent expenditures and maximize its revenue potential will be critical for fiscal sustainability, national policies feature prominently in subnational fiscal adjustment. Tamil Nadu's quest for fiscal sustainability is relevant for other countries. Decentralization has given subnational governments in developing countries significant spending and taxation responsibilities, and the capacity to incur debt. The fiscal stress of the Indian states echoed the fiscal crises of subnational governments in several other major emerging economies.

Keywords: Banks & Banking Reform, Fiscal Adjustment, Public Sector Economics & Finance, Economic Theory & Research, Economic Stabilization

Suggested Citation

Ianchovichina, Elena and Liu, Lili and Nagarajan, Mohan, Subnational Fiscal Sustainability Analysis: What Can We Learn from Tamil Nadu? (June 1, 2006). World Bank Policy Research Working Paper No. 3947. Available at SSRN: https://ssrn.com/abstract=923254

Elena Ianchovichina (Contact Author)

World Bank ( email )

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States
202-458-8910 (Phone)
202-522-1159 (Fax)

Lili Liu

World Bank - Poverty Reduction and Economic Management Network (PREM) ( email )

Washington, DC 20433
United States

Mohan Nagarajan

World Bank ( email )

Washington, DC 20433
United States

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