An Analysis of Fiscal Policy in an Emerging Economy: Innovative and Sustainable Fiscal Rules in India

Abstract

Fiscal management is considered to be effective only if fiscal imbalances do not create any macroeconomic instability in an economy. In a federal structure, the performance of sub-national constituents as well as the national government is significant for growth and development. Fiscal imbalances set in the Indian economy both at the national and sub-national levels during 1980s and became a matter of concern by the end of the last century. Accordingly, fiscal responsibility legislations (FRLs) were enacted by the two layers (union and state) of the government. It is not the enactment but the effective implementation leading to fiscal discipline and consolidation which is important. This article seeks to examine the Fiscal Responsibility and Budget Management Act, 2003 of a developed Indian state situated in the northwest of India, that is, Punjab. Various fiscal consolidation targets are reviewed against the actual outcomes of those fiscal parameters which are outlined in the FRL of the State. Some policy pre-scriptions for innovative and sustainable fiscal rules have been suggested.