ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Evolving Centre–State Financial Relations

After the Fourteenth Finance Commission award, aggregate transfers as a percentage of gross domestic product has increased, while grants as a percentage of GDP has declined. The centre is resorting to cess and surcharges that are not shared with the states. This would mean denial of revenue to states, which goes against the spirit of the Constitution. Further, the states have a reduced untied fi scal space, with the union’s share in Centrally Sponsored Schemes in 2016–17 (BE) being reduced. Finally, in the absence of plan transfers, post 2017–18, the focus should be to develop a framework for non-fi nance commission grants to states which is predictable and certain.

Budgetary Arithmetic, Fiscal Imprudence and Macroeconomic Implications

Notwithstanding the attempts made to undo the budget deficits initiating the fiscal reform process, the art of budget making in India is far from salutary both in terms of content, and macroeconomic and social implications. Given the political economy fundamentals (institutional constraints), the adherence to fiscal rules may, at best, contain the overall public expenditures through fiscal pruning measures, but may fail in addressing (i) the distributional effects of public expenditure policies, and hence, (ii) the composition of public expenditure.

Fiscal Deficit and Rate of Interest

This paper examines whether in the financially deregulated regime, shift in the financing pattern of the fiscal deficit away from seigniorage and external debt financing to bond financing has the probability of creating an upward pressure on the rate of interest in India. Using an asymmetric vector autoregressive model, we found that in the deregulated financial regime, the fiscal deficit did not create a rise in the interest rate. Rather, the causality runs from the exante real rate of interest to fiscal deficit. This result is in conformity with the recent trend in Indian public finance where the high interest rate fuelled the accumulation of more debt through increase in interest payments and the consequent debt-deficit spiral.
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