RBI Staff Studies 1 FISCAL CONSOLIDATION BY CENTRAL AND STATE GOVERNMENTS: THE MEDIUM TERM OUTLOOK

The paper examines the fiscal consolidation process under the FRBM/ FRLs Acts both at the Centre and State level and attempts to provide a medium term outlook. It finds that up to 2007-08, under the rule based framework, both the levels of Government were able to recover from the severe fiscal stress experienced starting with mid/late nineties till early part of this decade. The high growth rate leading to improved revenue buoyancy or growth dividend played an important role in the improvement of key deficit indicators. At the same time, the paper notes that despite the significant fiscal correction both at the Centre and States, the fiscal consolidation process remained inadequate on several fronts. Based on the macroeconomic trend prevailing up to 2007-08, the paper projects a medium term fiscal outlook (2010-15) for both the Central Government and State Governments. The paper also sets out alternate fiscal outlooks in the annex based on possible lower growth scenario. It is, however, cautioned that the medium term outlook estimated in the paper crucially hinges on the realization of assumed growth rate and inflation. While highlighting the need for designing appropriate post FRBM/FRL fiscal architecture to carry forward the process of fiscal correction and consolidate the gains on a durable basis, the paper suggests some elements of future design of the fiscal architecture for deliberation and consideration