A Macro Fiscal Adjustment Model for Tamil Nadu State in India

Although fiscal imbalance and its adverse effects on macro economic equilibrium in India have been receiving wide attention, the issue at States' level has not so far been adequately analyzed. In many respects, fiscal situation in States is more critical than that at the Centre as States have the Constitutional responsibility for providing basic social and economic services, yet, do not have independent power to borrow from the market or the central bank. Given these constraints, the burden has tended to fall on capital and maintenance expenditures with adverse implications. If the same trends continue, the fiscal deficit is likely to assume disquieting proportions. Since most of the issues are common to States, it is possible to have a common reform package. In this paper, an attempt has been made to suggest such a common package. A recursive model with the twin objectives of forecasting and policy simulations has been developed, and the impact of the suggested reform package has been estimated for the State of Tamil Nadu as an example