Evaluating the Long-run Sustainability of India’s Fiscal Management with Structural Change

Abstract

Amidst output moderation, rising deficits and increasing debt, India’s macro-fiscal arithmetic witnesses severe strain and often invites downward rating pressures by sovereign rating agencies. The article aims to examine India’s fiscal sustainability during the past four decades employing time series integration and cointegration techniques, with structural breaks in a sequential schematic framework under intertemporal government budget constraints. It examines stationarity with exogenous and endogenous structure breakpoint(s) at the level and slope for government revenue and expenditure data-generating process following Narayan and Popp (2010), Lee and Strazicich (2003), Zivot and Andrews (1992) and Perron (1989). Furthermore, the cointegration vectors of these fiscal variables in Fully Modified Ordinary Least Squares (FMOLS), Dynamic Ordinary Least Squares (DOLS) and a generic cointegration framework following Gregory and Hansen (1996) with structural shifts confirm the sustainability of India’s fiscal management. However, a less-than-unity estimate of the DOLS cointegrating slope parameter with few exogenous breakpoints signifies a weak form of sustainability and hence emphasises a credible commitment to fiscal consolidation going forward for India. JEL Codes: C32, H50, E62, H62