Journal of Indian School of Political Economy

Ajit Karnik ¹

Affiliations
1 Department of Economics, University of Mumbai, IN

Abstract

Developed countries of the west have always held a fascination for countries embarking on the path of development. Catching up with the west has been a strong driving force in the various strategies of development that have been followed. However, the exact ingredients of these strategies have been a matter of considerable debate. This is reflected not only in the policies that have been followed over the years but also in the thinking that has dominated the discipline of Development Economics.

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Ajit Karnik ¹, Mala Lalvani ²

Affiliations
1 Middlesex University, Dubai, AE
2 Department of Economics, University of Mumbai, IN

Abstract

Fiscal responsibility legislation (FRL) has been seen as an important measure to control the fiscal profligacy of governments. While initially FRLs were enacted at the level of federal or central governments, it was soon realised, that for sustaining the health of government finances, such legislations were required for subnational governments as well. India has been no exception to this. This paper focuses attention on the impact of FRL in the state of Maharashtra which was enacted in 2004-05 in the wake of worsening public finances. While the finances of the government of Maharashtra have improved after 2004-05, we explore the factors that have led to this improvement. We do this by carrying out a time consistency check by performing rolling computations comparing the fiscal performance in the pre- and post-FRL time periods. An econometric exercise, using GMM estimation, is also employed for this purpose. We find that much of the improvement in the public finances of the state has been driven by transfers from the central government rather than through the effort of the state itself.

Keywords

Fiscal Responsibility Legislation, Federal Systems, Inter-Governmental Transfers JEL Code:E62, H75, H77.

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Ajit Karnik ¹

Affiliations
1 Department of Economics, University of Bombay, Bombay, IN

Abstract

The last few years, especially after the initiation of economic reforms in India, have seen a lot of soul searching with respect to the development strategy that had been followed in this country over the last three and half decades. To be fair, there have been misgivings in certain quarters regarding the path that India has charted out since 1991-92, as well.

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