Fiscal Conundrum of the North-Eastern States of India

Abstract

A smooth operation of the public budget requires simultaneous growth of macro-fiscal instruments. In this background, the study intends to estimate the macro-fiscal determinants of the public budget in the North-Eastern states (NES). The percentage estimation of fiscal capacity, fiscal dependency and revenue base depicts an overall fiscal conundrum in the NES. The empirical estimation procedure begins with the unit root test, followed by a Pedroni cointegration test, followed by the fully modified least square and the dynamic least square model to estimate the degree of relationship. Two series have been estimated to avoid multicollinearity. The results depict a cointegration between the macro-fiscal instruments (total government expenditure, state’s own revenue (SOR), gross state domestic product (GSDP), grants (GR), gross fiscal deficit (GFD) and revenue deficit (RD)). The results show that the SOR, GSDP and GR are the positive and significant determinants of government expenditure. On the other hand, GFD is a positive yet insignificant determinant of government expenditure. RD is a negative and significant determinant of government expenditure. This implies that a stronger revenue generation capacity could result in augmenting the public budget for the efficient provision of public services. JEL Codes: E62, H1, H50, H62, H71, H72