The IUP Journal of Applied Finance
Fiscal Legislation, Debt Management and Social Spending: A State-Level Analysis in India

Article Details
Pub. Date : Jan, 2020
Product Name : The IUP Journal of Applied Finance
Product Type : Article
Product Code : IJAF30120
Author Name : Ishfaq Ahmad Khoja, N A Khan
Availability : YES
Subject/Domain : Finance
Download Format : PDF Format
No. of Pages : 23



The implementation of Fiscal Responsibility and Budgetary Management (FRBM) Act led to a conflicting trade-off between fiscal discipline and social sector spending. The scenario was expected to be even worse at the state level, given the imbalance between responsibilities and revenue of the states. This led to a legitimate intellectual apprehension fearing that the states may resort to a deliberate slashing of vital capital and social sector expenditures to maintain fiscal equation. The current study is an addition to the literature along the same line wherein we have tried to highlight the effects of fiscal rule on the fiscal discipline and thereby on social spending in Indian states. A majority of the states were found to have experienced more fiscal impotence in the post-reform period, especially post global melting down of 2008. On average, the states exhibited a conflicting scenario between social spending and fiscal potency, though with some variability between general and special category states. Further, the states are found to rely on deficit financing for their social sector spending mainly. The broad conclusion emerged thereupon was that states in the Indian federation, to maintain their fiscal commitment as mandated by FRBM, have resorted to slashing of social sector spending.


The concept of debt and its dynamics had assumed global importance, especially post the 1970s and received a prominent place during the Thatcher government in Britain. However, it in no way amounts to the complete absence of the term before. The concept has its strong ancestral affiliations with the Austrian school of thought led by Carl Menger during the late 19th century. The Austrian economists stress the real austerity in terms of balanced budgets, with no scope for the deficits and hence debts.1 However, the Keynesians strongly condemned it and were in favor of state intervention with its primary goal to target public welfare. Soon the voices against the theory of Humbug of Finance or alternatively the Treasury view of finance-2 were discarded and interventionism was institutionalized by institutions like IMF, World Bank, etc.


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