Examining Sustainability of Federal Finances in India: An Application of Non-stationary Panel Methods

This paper examines the fiscal sustainability of Indian States during the 1990s on the basis of their budgetary data. Sustainability has been discussed using the inter-temporal budget constraint framework and has been tested by applying the panel co-integration technique. The panel analysis reveals that revenue receipts and revenue expenditures are co-integrated across the States. Further, the insensitivity of the results to the choice of the period of analysis attests the robustness of the result that the State finances in India may not be unsustainable.