In the last decade, fiscal rule was introduced to institutionalize rule‐based fiscal control in India by enacting Fiscal Responsibility Legislation by the Union and state governments. Using a 14 year data set from 2000–01 to 2013–14, spread across 14 major states, this paper examines the impacts of fiscal rule on fiscal balance. Our findings confirm that the introduction of fiscal rule resulted in reduction in fiscal imbalance. The paper also found that, to comply with the deficit targets set by the fiscal rule, states resorted to spending cuts, primarily the discretionary development expenditures.
Economic performance is closely linked to the existence of good institutions. However, the quality of governance has also been identified as an important factor that affects economic growth and development. This paper empirically examines the significance of these factors in explaining variations in the per capita GDP of the Indian states and the extent of industrialization across them. Towards this end, indices for institutions-such as the protection of property rights, the efficiency of the legal system at the state level and the rule of law-as well as indicators of the extent and quality of State intervention and political stability, have been constructed to bring them into an empirically testable format. Empirical findings suggest that the quality of governance is significant in explaining the variations in state per capita GDP. Institutional factors play a significant role in explaining variations in the extent of industrialization across the Indian states.
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