A0304
Title: Escalated debt levels of Indian states: Who is responsible - the national or the state government?
Authors: Piyali Banerjee - Ashoka University (India) [presenting]
Abstract: The aim is to examine the co-movements and dynamics of state-level liabilities in India from 1994 to 2022 for 21 states. Using a dynamic factor model with time-varying loadings and stochastic volatility, the liabilities to GSDP ratio is decomposed into national, liability-specific, and state-specific factors. These factors help to assess how states with different liability levels and economic strength respond to fiscal pressures. The results reveal that common shocks, e.g., the GFC, Covid-19, and demonetization, play a dominant role in shaping the state liabilities. Over time, for the economically strong and low liability states, their influence has declined. Liability-specific factors, like the states with low and high liabilities, have gained prominence in the post-2014 era. The result is more evident in high GSDP states, indicating growing structural divergence. The empirical results show that states with strong fiscal discipline are characterized by higher own tax revenue and stable law and order. These states mostly rely on their internal debt levels. Besides, they are better insulated from national volatilities. In contrast, states heavily reliant on central transfers and subsidy-driven expenditure remain more exposed and are fiscally vulnerable. Findings highlight the need for a differentiated fiscal approach across states of India, with a policy focus on enhancing internal revenue capacity, rebalancing expenditure priorities, and fostering long-term fiscal autonomy.
