Estimating Fiscal Multipliers for States in India

Abstract

We estimate state-level fiscal multipliers for Indian states using a panel data set of 17 non-special and 10 special category states covering the period 2001–02 to 2016–17. The impacts of shocks to states’ own tax revenue, revenue expenditure, capital expenditure and grants from centre on income are measured employing panel vector autogressive technique of estimation. We find the effect of shocks to fiscal variable on income is greater in the long run vis-à-vis the immediate impact. For non-special category states, own tax revenue, capital outlay and grants from centre multiplier are over unity. Thus, capital expenditure expansion or tax cut are both effective to increase output. For special category states, fiscal stimuli based upon tax cuts are more effective than those based upon spending increases. Capital outlay multiplier, however, stands at 0.83. Hence, the study provides a rationale for ring-fencing of capital expenditure target to be most crucial for reviving growth in Indian states. JEL Codes: E62, H71, H72