Does Fiscal Deficit Matter for Economic Growth Performance of Indian States?

An Empirical Analysis




Considering a standard economic growth model, this study tries to empirically evaluate the effects of fiscal deficits on the economic growth of 14 major Indian states from 1980-81 to 2019-20. The panel fixed effect regression establishes that gross fiscal deficit (GFD), tax revenue, and inflation rates have a significant adverse impact on economic growth. In contrast, private investment, gross enrolment ratio (GER) in primary education, and the adoption of Fiscal Responsibility Legislations (FRLs) have favourable effects; non-tax revenues, GER in secondary education, and economic policy reform (EPR) didn't show any significant effect. Where FRLs were enacted, fiscal deficits showed a positive impact on growth in the post-FRL period. Further, we find a threshold effect of fiscal deficit on growth, implying that when GFD lies within a specified threshold, it has a positive impact; beyond this limit, it impedes states’ economic growth.


Fiscal Rule, Fiscal Deficit, Tax revenues, Non-Tax Revenues, Economic Growth, Indian States


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Authors Bio

Binod Kumar Behera, Centre for Development Studies

Binod Kumar Behera is a PhD research scholar at the Centre for Development Studies, Thiruvananthapuram, Kerala.

Hrushikesh Mallick, Centre for Development Studies

Hrushikesh Mallick is an Associate Professor of Economics at the Centre for Development Studies, Thiruvananthapuram, Kerala.


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