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Fiscal Deficit and Economic Growth Linkage in India: Impact of FRBM Act

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Challenges and Issues in Indian Fiscal Federalism

Part of the book series: India Studies in Business and Economics ((ISBE))

Abstract

The major objective of the study is to examine the impact of fiscal deficit on economic growth in India using Autoregressive Distributed Lag (ARDL) approach. It also analyzes whether the execution of Fiscal Responsibility and Budget Management (FRBM) Act has any influence on the fiscal deficit-economic growth linkage in India. The ARDL Bounds Testing Approaches to Cointegration confirm the long-run relationship among the selected variables. The estimated results show that fiscal deficit has an adverse effect on economic growth in both the long run and short run in India. The Pre-FRBM Act regime analysis reveals that implementation of FRBM Act has influenced and weakens the relationship between fiscal deficit and economic growth in India. The Government should contain the fiscal deficit and should try to achieve the target set by the FRBM Act.

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Notes

  1. 1.

    FRBM Act (2003) came into effect from July 5, 2004 in India. Again the Government of India had set up a FRBM Review Committee on 2016 to evaluate the FRBM Act, 2003. It implies that mounting fiscal deficit is a serious concern for the economy.

  2. 2.

    Fiscal deficit of the central government is used here for several reasons. First, combined fiscal deficit data isn’t available during the study period. However, it is available from 1980–1981 onwards. Second, policy makers give much more importance to fiscal deficit of the central government in India than other deficits. Third, FRBM Act (2003) was enacted to impose stringent fiscal discipline on the central government in its overall fiscal and macroeconomic management operations. Also one of the objectives of the study is to examine the influence of the FRBM Act. Fourth, FRBM Act isn’t accepted by all the states in India. Hence, the study has used the fiscal deficit of the central government only.

  3. 3.

    Time series data on employment in the unorganized sector is not available in India. Data constraint restricts to use organized employment for the proxy for employment in the analysis.

  4. 4.

    However, Post-FRBM act period is not analyzed due to insufficient observation.

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Author information

Authors and Affiliations

  1. National Institute of Public Finance and Policy (NIPFP), 18/2, Satsang Vihar Marg, Special Institutional Area, New Delhi, 110067, India

    Ranjan Kumar Mohanty

Authors
  1. Ranjan Kumar Mohanty
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Corresponding author

Correspondence to Ranjan Kumar Mohanty .

Editor information

Editors and Affiliations

  1. School of Economics, University of Hyderabad, Hyderabad, Telangana, India

    Naseer Ahmed Khan

Appendices

Appendix 1

Autoregressive Distributed Lag Estimates for Whole Period (1970–1971 to 2012–2013)

ARDL(2,0,0,0,0) selected based on Schwarz Bayesian Criterion

Dependent variable is LGDPF

Regressor

Coefficient

Standard Error

T-Ratio[Prob]

LGDPF(-1)

0.327

0.123

2.662[0.012]

LGDPF(-2)

0.449

0.116

3.889[0.000]

LFSDF

−0.028

0.011

−2.589[0.014]

LGDCF

0.063

0.039

1.622[0.114]

EMPLG

0.011

0.002

4.369[0.000]

INFLA

−0.002

0.6369E−3

−3.105[0.004]

Constant

1.770

0.369

4.787[0.000]

Trend

0.0132

0.002

5.375[0.000]

  1. R-Squared: 0.99, R-Bar-Squared: 0.99, F-stat. F(7, 33):8995.9[0.000]
  2. Akaike Info. Criterion: 105.594 Schwarz Bayesian Criterion; 98.740
  3. DW-statistic; 1.757

Appendix 2

Autoregressive Distributed Lag Estimates for Sub-period (1970–1971 to 2003–2004)

ARDL(1,0,0,1,0) selected based on Schwarz Bayesian Criterion

Dependent variable is LGDPF

Regressor

Coefficient

Standard error

T-Ratio[Prob]

LGDPF(-1)

0.538

0.085

6.312[0.000]

LFSDF

−0.072

0.016

−4.466[0.000]

LGDCF

0.109

0.048

2.244[0.034]

EMPLG

0.003

0.003

1.009[0.323]

EMPLG(-1)

−0.009

0.003

−3.266[0.003]

INFLA

−0.003

0.7255E−3

−4.243[0.000]

C

3.776

0.705

5.356[0.000]

T

0.0221

0.004

5.396[0.000]

  1. R-Squared: 0.99, R-Bar-Squared: 0.99, F-stat. F(7, 25): 3884.0[0.000]
  2. Akaike Info. Criterion: 85.289 Schwarz Bayesian Criterion: 79.303
  3. DW-statistic: 2.321, Durbin’s h-statistic 1.058[0.290]

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Mohanty, R.K. (2018). Fiscal Deficit and Economic Growth Linkage in India: Impact of FRBM Act. In: Khan, N. (eds) Challenges and Issues in Indian Fiscal Federalism. India Studies in Business and Economics. Springer, Singapore. https://doi.org/10.1007/978-981-10-6217-9_8

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  • DOI: https://doi.org/10.1007/978-981-10-6217-9_8

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  • Publisher Name: Springer, Singapore

  • Print ISBN: 978-981-10-6216-2

  • Online ISBN: 978-981-10-6217-9

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