Ricardian Approach to Fiscal Sustainability in India

Abstract

There are several approaches to assessing the sustainability of a country’s public finances. Ricardian equivalence is one such approach, in which fiscal sustainability is defined in terms of the neutrality of generational welfare through government fiscal policy. The present work is an attempt to discuss and analyse fiscal sustainability in India in the context of Ricardian equivalence. Different forms of empirically testable equations for testing Ricardian equivalence are derived based on studies by Buiter and Tobin (1978), Kormendi (1983) and Kormendi and Meguire (1990). A key aspect of fiscal sustainability is to ensure generational equity as reflected in India’s Fiscal Responsibility and Budget Management (FRBM) Act, 2003. Based on availability of data, empirical evidence is against the presence of Ricardian equivalence, indicating that the fiscal policy India pursued during the study period (1974–2011) has been detrimental to generational welfare neutrality. JEL Classification: H30, H20, H50, H62, H63