Do Fiscal Rules Promote Fiscal Performance and Economic Growth?

This study attempts to estimate the relationship between fiscal rules, fiscal performance, and economic growth of India as well as that of its sub-national economies, from 1991 to 2022. Fiscal rules indicate an adaptation of the FRBM Act of 2003 in 2004. For fiscal performance, we created a fiscal performance index of the central government and subnational economies with ten variables using the improvement index and deprivation index, which describe the fiscal situation of the economy. Its value varies from 0 to 100, where 0 indicates the worst situation and 100 indicates the best situation. The fiscal performance of India increased from 50.5 to 60.5 in the study period. However, at state level the fiscal performance remained stable only deteriorated during the Covid-19 recession and improved afterwards. The results of the two-stage least square model time series and panel model shows that economic growth contributes more significantly to fiscal performance at national level (0.0602) than at state level (0.0067). The fiscal rule has a positive impact on fiscal discipline for India (0.1383), indicating that enhances national fiscal performance. However, at the state level, fiscal rule has a negative coefficient (-0.0369), suggesting that stricter fiscal rules might constrain state-level fiscal flexibility, potentially leading to adverse effects on fiscal performance as well as economic growth.

Fiscal imbalance · Fiscal policy · Fiscal union · Index (typography) · Panel data · Recession · State (computer science) · Fiscal Policies and Political Economy · Fiscal Policy and Economic Growth · Sociopolitical Dynamics in Nepal