FISCAL RESPONSIBILITY LAW AND SUBNATIONAL FINANCE IN INDIA - AN ANALYSIS OF ASSAM’S FISCAL SCENARIO

Santosh Borkakati and Konthoujam Gyanendra Singh

Department of Basic Science and Humanities & Social Sciences, National Institute of Technology, Mizoram, India

Fiscal responsibility law has become an important instrument for better fiscal management and ensuring fiscal discipline, particularly so in the federal countries where their subnational governments often indulge in fiscal indiscipline. In 2003, India adopted the Fiscal Responsibility and Budget Management Act for rule-based fiscal discipline, and the states of India were also asked to adopt their own fiscal rule legislation in line with the legislation adopted by the central government. As a fiscally weak Indian state, Assam enacted the Assam Fiscal Responsibility and Budget Management (AFRBM) Act in 2005 for better fiscal management. The paper attempts to examine the impact of the AFRBM Act on the fiscal performance of the state by analyzing the dynamics of the fiscal variables in the pre- and post-AFRBM Act periods. The study finds that the state has improved its fiscal condition after the introduction of the AFRBM Act, even though it has remained prone to fiscal shocks.

Keywords: fiscal rules, subnational finance, fiscal deficit, fiscal stability

JEL Classification: E62, H30, H61, H70